Understanding Guarantees by Insurance Carriers | SafeMoney.c

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In previous blog posts, we’ve discussed financial products offered by insurance carriers, such as annuities. But what if an insurance company fails? What then happens to your money in the annuity or financial solution issued by that insurance carrier?

In the context of “Safe Money” – or money you can’t afford to lose – it’s worthwhile to discuss bank failures as well as insurance company failures. After all, bank options and annuities are two ways of preserving your wealth from the effects of market downturns. They’re means of keeping your hard-earned money safe.

Ultimately, it begins with two components: security and guarantees. It’s important to clarify exactly what anyone in the financial industry means when they use the term “guarantee.” In the case of insurance companies or banks, it refers to financial reserves they hold in cash or cash-equivalent securities. These reserve holdings are allocated toward ensuring a promise or guarantee.

For banks, the guarantee means you’ll always be able to get your money back and not suffer a loss. The Federal Deposit Insurance Corporation (FDIC) is tasked with insuring savings accounts against future bank failures. But the FDIC and its involvement come with many misnomers, some of which the American public is largely unaware. And they amount to strong differences from the guarantee offered by an insurance company, too.

Differences between FDIC and Insurance Companies

Here are some things to keep in mind about the FDIC:

• The FDIC is an independent corporation and isn’t part of the government
• How the government is involved: Congress sets the required reserves for a bank to guarantee your money stays in place
• The FDIC only guarantees your principal, not your earnings
• Currently, $1.40 is set as a reserve requirement for every $100.00 in the bank
• Therefore, the FDIC offers a “guarantee ratio” of $1.40 for protecting every $100.00

Contrast this with the guarantees offered by insurance companies:

• State insurance commissions regulate insurance carriers
• Each state insurance commission requires an insurance company to guarantee $1.00 in reserve for every $1.00 on deposit
• As a result, insurance companies offer dollar-for-dollar reserves while banks offer reserves of $0.014 for every dollar

In other words: There are clear differences in these guarantees provided by banks and insurance carriers. Now let’s consider how these distinctions play out in the event of a bank or insurance company failure.

Insurance Company Failures

To start, it’s important to distinguish between bankruptcy and failure. Bankruptcy refers to the process of a business going out of existence. Failure is simply the process of when a company fails. For instance, when an insurance company “fails,” it’s fallen below the reserve requirement for upholding its guarantee.

When a bank fails, the FDIC covers deposit holdings, but as we discussed above that coverage is limited. In contrast, every insurance company within a state has a “guarantee association,” or an association managed by the state. The association guarantees up to $250,000 in an annuity contract if an insurance company would fail. Another layer of protection is found in the seldom use of this protection measure. Every state requires an insurance company offering annuities within its boundaries to reinsure all the other companies offering annuities there, too.

In other words, say an insurance company offers a specific annuity product. Other companies extending that annuity option have to reinsure that insurance carrier. In turn, the first insurance carrier must reinsure the other companies. Should an insurance carrier fail, its contracts and policies will be delegated by the state to the other, reinsuring insurance companies. Your money is protected by the original insurance company, as well as the other parties backing it via the reinsurance mechanism.

What Does this Mean for Me?

In a nutshell:

• With these two layers of protection insurance carriers offer strong safeguards
• The “reinsurance” measure means the association guarantee is rarely used
• As a result, an insurance company failure doesn’t happen often
• The “guarantee ratio” for reserves is higher for insurance companies than it is for banks

Consider this in real-world statistics. Between 1987 and 2009 there were 74 insurance company failures. In 2010-2011 there were 249 bank failures alone. In the event of a bank failure, the FDIC steps in. In the event of insurance company failure, the insurance companies are backed by their counterparts, and/or state guaranty associations.

Other Benefits of Annuities

Aside from these protection measures, annuities offer other upsides. In particular, fixed index annuities offer tax-deferred wealth accumulation, principal protection, and safety from the risks like market fluctations. Like all financial products, annuities will differ in terms of the value they provide to each person. Ultimately, any financial solution should make sense for your financial picture.

If you’re ready to see if an annuity makes sense for your lifestyle and retirement goals, SafeMoney.com can help you. Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.

Frequently Asked Questions About the guarantees offered by insurance carriers

What guarantees do insurance carriers offer with fixed annuities?

Insurance carriers typically offer guarantees such as a minimum interest rate on your investment, protection against market losses, and a guaranteed income stream for a specified period or for life. These guarantees can provide peace of mind, especially for retirees looking to secure their financial future without the volatility associated with stocks.

How do I know if an insurance carrier is financially stable?

To assess an insurance carrier's financial stability, you can check their ratings from independent rating agencies like A.M. Best, Moody's, or Standard & Poor's. These ratings evaluate the company's ability to meet its ongoing insurance obligations, which is crucial when considering safe money alternatives for retirement.

Can I access my money in a fixed annuity if I need it?

While fixed annuities offer guarantees, accessing your money before the end of the surrender period may incur penalties. Many fixed annuities allow for partial withdrawals or loans, but it's important to understand the terms and potential fees before committing to an annuity.

What are the tax implications of withdrawing from a fixed annuity?

Withdrawals from a fixed annuity are typically subject to income tax on any earnings, and if you take a withdrawal before age 59½, you may also face a 10% early withdrawal penalty. It's essential to consult with a tax advisor to understand how these implications can affect your overall retirement strategy.

Take the next step, run the numbers with our free retirement calculators.

Updated May 2026: State insurance guaranty associations protect annuity contract holders up to specified limits — typically $250,000 per person in most states — providing an important safety net for retirees relying on fixed or indexed annuity income.