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Investing Advice Inspired by Jack Bogle
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Dan Kohn
Joined: 26 Jun 2007
Posts: 1504
Location: New York, NY
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 Posted: Sun Sep 14, 2008 7:00 am Post subject: Can only New Yorkers safely buy large annuities? |
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Given the possible (though still unlikely) failure of AIG this week, I've spent some time researching state guarantees of annuity coverage, and have not found good news.
As daryll40 pointed out to me in another thread, most state guaranty organizations only cover an annuity from each company for $100 K and only cover all annuities in aggregate for $300 K. I've repeatedly recommended single premium immediate annuities to others in the past, but will now hesitate to do so for more than $300 K of value split evenly across 3 companies. Although failures of big insurance companies are unlikely events, the current credit crisis shows that they are unfortunately unlikely events with a high cross-correlation. Although even AIG's failure would still result in their annuities paying out some (probably high) number of cents on the dollar, that level of risk is really not appropriate when someone has irrevocably locked up a significant portion of their assets.
Here is a summary of state guaranty limit amounts. Every state but 9 cover $100 K max per policy and $300 K max per individual, so this page has a convenient description of coverage in just those 9 states.
Now, New York (my new home) already stood out by having $500 K in aggregate coverage, the largest of any state. But I found this surprising February 11, 2008 letter from the Office of General Counsel (I originally said attorney general) declaring that the coverage is actually $500 K per annuity with no max per individual. Unfortunately, this is contradicted by the Life Insurance Company Guaranty Corporation of New York website, which says that the max per individual is $500 K. I've emailed their counsel asking which is correct.
Unless I hear back confirmation, I can't see recommending that anyone annuitize more than $500 K in New York state and $300 K elsewhere (split evenly among 3 companies). The chance of one insurance company failing and wrecking an annuitized retirement is just too large otherwise. Do others believe differently?
Last edited by Dan Kohn on Sun Sep 14, 2008 7:32 am; edited 1 time in total |
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Ron
Joined: 23 Feb 2007
Posts: 3072
Location: Lehigh Valley, PA
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| Posted: Sun Sep 14, 2008 7:27 am Post subject: |
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I may have missed it, but how do you determine what your "coverage" is?
For example, I'm in my second year of SPIA payments. According to the documents, I am more than covered for my initial "buy in".
However, if you take the terms of the policy I hold, total payments (on this guaranteed term SPIA) exceeds the stated limits. Does the default "deduct" the payments already received as part of any anticipated settlement? Additionally, does the coverage allow for reimbursement of "future payments" that still are to be made?
Just additional points to consider (unless the answer is "out there" somewhere  ).
- Ron
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LH2004
Joined: 27 Mar 2007
Posts: 1745
Location: New York, NY
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| Posted: Sun Sep 14, 2008 7:28 am Post subject: Re: Can only New Yorkers safely buy large annuities? |
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| Dan Kohn wrote: | | But I found this surprising February 11, 2008 letter from the attorney general declaring that the coverage is actually $500 K per annuity with no max per individual. |
That letter is quite clearly NOT from the Attorney General. It's from the Office of General Counsel of the Insurance Department. That conclusion is explicitly stated to be "In the Insurance Department’s view." I don't think that the Insurance Department's view on that issue issue is particularly relevant.
| Quote: | | Unfortunately, this is contradicted by the Life Insurance Company Guaranty Corporation of New York website, which says that the max per individual is $500 K. I've emailed their counsel asking which is correct. |
That's just going to be one more opinion. There is little chance the Guaranty Corporation is going to be bound by whatever he says.
| Quote: | | nless I hear back confirmation, I can't see recommending that anyone annuitize more than $500 K in New York state and $300 K elsewhere (split evenly among 3 companies). The chance of one insurance company failing and wrecking an annuitized retirement is just too large otherwise. Do others believe differently? |
You're getting into remote risks. There is some chance you could be left with nothing more than that amount; that doesn't mean that NO one should take that small risk. But it is a risk.
Remember that the risk only applies to fixed annuities (and life insurance, etc.). With variable annuities (and life), other than the guaranties and fixed interest options, your money is safely sitting in separate accounts. |
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Dan Kohn
Joined: 26 Jun 2007
Posts: 1504
Location: New York, NY
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| Posted: Sun Sep 14, 2008 7:37 am Post subject: coverage |
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| Ron wrote: | | I may have missed it, but how do you determine what your "coverage" is? |
This page lets you see the specific legislative language for your state. nisiprius makes a good argument that it is the present value of your annuity that would be measured.
But the opacity of information is pretty appalling compared to the detail available from the FDIC. |
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bobcat2
Joined: 20 Feb 2007
Posts: 1571
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| Posted: Sun Sep 14, 2008 7:42 am Post subject: A question |
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To the best of my knowledge no insurance company in the last 40 years has gone belly up and not paid anything to annuitants. However, at least two insurance companies have only paid 70 cents on the dollar.
Suppose my insurance company becomes insolvent and will pay 70 cents on the dollar. My life annuity with the company has a PV of $150k. The state insurance limit is $100k.
Here's my question. Does that mean the state insurance pays me $100k and the insurance company pays me 70% of the remaining $50k? In this case I am out $15k, because I get $100k from state insurance and $35k from the company.
Or does it mean that the insurance company makes good on 70% of the $150k, which is $105k, and the state insurance says you got back $105k, which is more than the $100k limit, so we don't owe you anything and in this case I am out $45k.
Bob K
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A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents die and a new generation grows up that is familiar with it. |
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nisiprius
Joined: 26 Jul 2007
Posts: 7671
Location: North America; Western Hemisphere; the Earth; the Solar System; the Universe; the Mind of God
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| Posted: Sun Sep 14, 2008 9:51 am Post subject: |
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| Dan Kohn wrote: | Given the possible (though still unlikely) failure of AIG this week, I've spent some time researching state guarantees of annuity coverage, and have not found good news.
As daryll40 pointed out to me in another thread, most state guaranty organizations only cover an annuity from each company for $100 K and only cover all annuities in aggregate for $300 K. I've repeatedly recommended single premium immediate annuities to others in the past, but will now hesitate to do so for more than $300 K of value split evenly across 3 companies...
Unless I hear back confirmation, I can't see recommending that anyone annuitize more than $500 K in New York state and $300 K elsewhere (split evenly among 3 companies). The chance of one insurance company failing and wrecking an annuitized retirement is just too large otherwise. Do others believe differently? |
Until daryll40 pointed it out I had missed the extremely important detail of most? all? states having a cap on the grand total the guaranty association is required to pay out to any single individual.
I will be very interested to here what reply you get to your inquiry, because I and several other Bogleheads have, so far, been uniformly frustrated in getting anyone to go on the record with regard to questions about Guaranty Association protection.
My interpretation of this behavior that everyone is afraid to run afoul of the provision of the law that says Guaranty Association protection can't be used as an inducement to buy. SPIA purchasers are deliberately kept, maybe not in the dark, but in a murky half-light. I perceive the industry's attitude as "we're very highly rated, Aa3++- 'leaps fairly tall buildings in two or three bounds,' the Guaranty Association will send you their leaflet, we don't answer hypothetical questions, if you don't trust our financial strength don't buy our annuity."
I think your restriction is overly cautious because it doesn't take into account the fact that a highly-rated insurer is not likely to fail right away, and the present value of the annuity, which is what is protected, drops over time, so you could be over the limit when you buy the annuity but within it by the time the company fails.
I see that I need to spend some quality time with a paper I'd only skimmed, Babbel and Merrill (2007), Rational Decumulation.
It actually goes into this in some detail, and the relevant remarks are: | Quote: | | These are rather astonishing increases in the size of annuities willing to be purchased devolving from the insurance guaranty associations, especially in light of the assumption that only 10% of an initial excess wealth of $1 million would be covered by the program. Upon further analysis, it is easy to understand why. Four reasons contribute to the sizable increases in the propensity to annuitize with even modest levels of guaranty. First, a $100,000 guaranty amounts to 13% initial protection for an annuity of $770,000, not a 10% initial protection, and an even higher percentage of value protection for smaller annuities. Second, if a default is going to occur, it occurs on average about 25 years after the annuity purchase from an insurer with a claims paying rating of single-A at the outset. By that time, an annuity worth $590,000 at initial purchase (i.e., 59% of initial wealth) will have only about $198,000 of present value of payments remaining, so the guaranty of $100,000 looms large. And if the default occurs even later, up to 100% of the remaining annuity value may be covered by a guaranty level of $100,000. In essence, the older people are even better protected than the younger ones by the fixed guaranty program limits. |
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Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. |
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nisiprius
Joined: 26 Jul 2007
Posts: 7671
Location: North America; Western Hemisphere; the Earth; the Solar System; the Universe; the Mind of God
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| Posted: Sun Sep 14, 2008 10:02 am Post subject: |
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| Ron wrote: | I may have missed it, but how do you determine what your "coverage" is?
For example, I'm in my second year of SPIA payments. According to the documents, I am more than covered for my initial "buy in".
However, if you take the terms of the policy I hold, total payments (on this guaranteed term SPIA) exceeds the stated limits. Does the default "deduct" the payments already received as part of any anticipated settlement? Additionally, does the coverage allow for reimbursement of "future payments" that still are to be made?
Just additional points to consider (unless the answer is "out there" somewhere ).
- Ron |
The part of the answer I know is that what is covered is the "present value" of the annuity, which declines over time. This is the guessiest guesswork on my part, but what this ought to mean is that if the present value of the annuity is under the limit (and other limits don't apply) then the guaranty association ought to be able to find another insurer who will take over the contract and replace it with one that has about the same terms and payout rates as the one you had, and life goes on pretty much unaffected.
And if the Guaranty Association protection is X% of the "present value," they ought to able to arrange for a new annuity contract that pays you X% of what the old one would have paid.
That's my guess.
_________________
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. |
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Dan Kohn
Joined: 26 Jun 2007
Posts: 1504
Location: New York, NY
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| Posted: Mon Sep 15, 2008 5:32 pm Post subject: Email from New York Guaranty Corporation |
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I got a quick and helpful (though negative) reply from the Counsel at Life Insurance Company Guaranty Corporation of New York:
I wrote:
| Quote: | Hi, I'm trying to figure out what the New York state coverage is for 3 $200 K annuities. I'm a New York resident.
This letter from the attorney general indicates that the full $600 K is covered.
http://www.ins.state.ny.us/ogco2008/rg080206.htm
This webpage says that only $500 K is covered.
http://www.nylifega.org/faq.cfm?id=456
Given the frailty of AIG right now, this issue may unfortunately come up. Could you please tell me which is correct? |
He replied:
| Quote: | Dan,
There's no contradiction.
Our website points out that if you have three contracts with the same company, you only get the $500K limit once.
The NYID OGC's letter takes the position that if you have three contracts with three different companies, the $500K limit applies separately to each. Please note, however, that the Guaranty Corporation has not taken a position on this issue, and that the OGC's opinions are not binding on the Guaranty Corporation or on any court.
Best,
Carl |
So, the smart move certainly seems to be stay below the $500 K limit ($300 K in other states). |
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nisiprius
Joined: 26 Jul 2007
Posts: 7671
Location: North America; Western Hemisphere; the Earth; the Solar System; the Universe; the Mind of God
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| Posted: Mon Sep 15, 2008 6:16 pm Post subject: Re: Email from New York Guaranty Corporation |
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| Quote: | Dan,
There's no contradiction.
Our website points out that if you have three contracts with the same company, you only get the $500K limit once.
The NYID OGC's letter takes the position that if you have three contracts with three different companies, the $500K limit applies separately to each. Please note, however, that the Guaranty Corporation has not taken a position on this issue, and that the OGC's opinions are not binding on the Guaranty Corporation or on any court.
Best,
Carl |
I love it. This is so typical of my own humble efforts to resolve other questions. If this is not a "contradiction," it will do until the real thing comes along.
And the best part is, you've only gotten an answer--or, rather, a non-answer--that applies to one state.
In another thread, prh2s succeeded in getting this answer from the director of the Guaranty Association in Virginia:
| prh2s wrote: | ]]Here's what I wrote to her:
| Quote: | In response to the question "Are all policies fully protected?" the
web site states that "in no event shall the Association be liable to
expend more than $350,000 in the aggregate with respect to any one
individual." Does this mean that the Association will not expend more
than $350,000 per individual (a) with respect to all policies and
annuities issued by a single failed insurer, or (b) with respect to
all policies and annuities, even if issued by different failed insurers? |
Here is her response:
| Quote: | | (a) is the correct response [. . .]. Each insolvency of an insurance company stands on its own. If you receive benefits from this Association for the failure of company "A," that will not impact your right to receive benefits from this Association because of the failure of company "B" (provided, of course, that you had covered policies with both company A & B). |
Of course, this is just Virginia, but since the ambiguity in Virginia's rule is similar to the ambiguity in other states' rules, people may find that their states' guaranty associations and departments of insurance interpret the rules the same way Virginia does. |
Or then again, maybe not. Or they may find, as you did, that the guaranty associations and departments of insurance interpret the rules in different ways.
It also succeeds in achieving the goal of keeping you in doubt as to what guaranty association protection amounts to, thus keeping you from basing your purchase decisions on that protection.
_________________
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. |
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bluemarlin08
Joined: 29 Aug 2007
Posts: 332
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| Posted: Mon Sep 15, 2008 7:11 pm Post subject: |
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| Perhaps the best thing to do is avoid placing any assets in any form of annuity. |
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Dan Kohn
Joined: 26 Jun 2007
Posts: 1504
Location: New York, NY
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| Posted: Mon Sep 15, 2008 8:10 pm Post subject: Annuities |
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| bluemarlin08 wrote: | | Perhaps the best thing to do is avoid placing any assets in any form of annuity. |
Annuities remain a great option if you're willing to trade a portion of your heir's inheritance for higher consumption now. It just doesn't seem like a good move to annuitize more than $300 K. |
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