The Star-Ledger Archive
COPYRIGHT © The Star-Ledger 2008
Date:
2008/09/17 Wednesday Page: 051 Section: BUSINESS Edition: FINAL Size: 911 words
Series: THE BIG MELTDOWN
ASK
THE BIZ BRAIN
BY KARIN PRICE MUELLER
STAR-LEDGER STAFF
The
worrisome news continues to pour in from financial services companies, so the Biz Brain is working overtime this week trying
to sort out what all of this means to your wallet.
Yesterday
morning, our mailbox was exploding with eight queries about troubled insurer AIG. So, here are a couple of the questions that
represent the gist of them and a quick primer on the often arcane world of insurance. We hope this helps you make sense of
it all.
Oh, and keep the questions coming. Send them
to askbiz@starledger.com.
Q.
My mom bought a five-year annuity from AIG through Wachovia Bank. If AIG goes under, is the annuity insured? She bought the
annuity the first week of September.
— Ira
A. The
good news is that if an insurance company such as AIG goes out of business, your mom won’t be out on the street —
but she has some issues.
It depends
largely on the specifics of the annuity, and what you mean by “five-year,” but we’ll get to that in a moment.
First, if your mom has a fixed annuity that hasn’t
yet been tapped, claims would be covered by state guaranty associations. Those associations will either pay the claims directly
or transfer the policies to a financially stable insurance company, says Anthony Caltabilota, a certified financial planner
and president of Calta Tax & Financial Services in Hazlet.
New
Jersey Life & Health Insurance Guaranty Association protects state residents who are policyholders and beneficiaries issued
by an insolvent insurance company.
Protection limits
vary by state. New Jersey offers resident policyholders up to $100,000 of protection for the cash surrender value of fixed
annuities and $500,000 in protection for fixed annuities that are already annuitized. AIG, and all insurers in New Jersey,
are required to be members.
If a member company becomes
insolvent, money to continue coverage and pay claims is obtained through assessments of the guaranty association’s other
member insurance companies writing the same line or lines of insurance as the insolvent company.
Now, for the “five-year” part.
If the annuity is a five-year certain annuity, that means your mom is already receiving an income
stream. Your mom — or her beneficiary — was guaranteed payments for five years. The payments would cease at death
or after the five years, whichever was the longer. Your mom would be protected for up to $500,000 of the present value of
the total annuity streams, says Doug Buchan, a certified financial planner with Tilson Financial Group in Watchung.
If it’s a five-year surrender product, that means she will have
to pay a lofty fee to get out of this product until five years are up, Buchan says.
Finally, if it was a five-year fixed-rate guaranteed annuity, meaning the interest rate on the annuity
was fixed for five years, the insurance company that takes over the account if AIG goes under doesn’t have to honor
those terms or that interest rate.
If your mom’s
annuity is a variable annuity, it wouldn’t receive the same protections, because there is no insurance risk. The value
of the account depends on the value of the underlying investments, such as stocks or mutual funds. If AIG goes under and a
variable annuity is transferred to another insurer, the underlying investments, and value, would remain the same.
“It is important to note that the guarantees within a variable annuity
contract are backed by the issuing life company’s general account, which supports only the obligations of that life
company, and no other company,” says Vince Pallitto, a certified financial planner and certified public accountant with
Summit Asset Management in Florham Park.
If the annuity
was taken out in the past 10 days — you said the first week of September — there is a 10-day free-look period,
Pallitto says. If you are within that period, you can cancel any newly written contract.
If you do want to transfer the account, there would be no tax consequences, Buchan says.
“The bad news, which is one of several reasons
I don’t love annuities, is that I imagine you may have a sub¬stantial surrender charge to move this annuity out
from AIG,” he says.
Depending on the contract,
the charge could be as much as 8 percent.
Some companies
offer a bonus of 4 percent or 5 percent upfront if you switch your annuity to their company.
Pallitto says, for example, if you invested $100,000 in an AIG annuity and you surrender
the contract during the 8 percent CDSC period, you could invest the $92,000 in another company’s bonus contract. With
a 4 percent bonus, you would have $95,680, which helps with your loss. Pallitto likes ING, AXA, John Hancock and Hartford,
depending on the client.
For more answers, check out
the websites of the New Jersey Life & Health Insurance Guaranty Association (njlifega.org) and the National Organization of Life and Health Insurance Guaranty Associations (nolhga.com).
Q. We’re very concerned
about the status of our car insurance. AIG is our carrier. If they go under, are we still covered? If no one buys them out
and they go into bankruptcy, what’s next?
— John from Somerville
A. Just as they do for other insurance
products, states maintain guarantee funds to protect car insurance policyholders against insurance company failures. In your
case, if AIG were to fail, Caltabilota says its policies would be assigned to other insurers in the state.
