What the AIG Bailout Means for You

My husband and I hold life insurance policies with American International Group (AIG), which the government just bailed out so it wouldn't fail. How can I tell whether the company would be in a position to pay out on my policies?

AIG's financial turmoil has been a big concern to many Kiplinger readers -- especially because it has offered some of the lowest term insurance rates for the past few years, and the company underwrites the popular Vanguard immediate annuity. The bottom line for these customers: AIG's insurance subsidiaries do have assets available to pay claims, and there are several layers of protection for policyholders.

AIG has several different businesses, and only some of them deal with insurance. Those insurance subsidiaries are subject to different rules from the rest of the company. The state insurance departments set strict capital requirements to make sure insurers can pay claims. As a result, those subsidiaries are not suffering from the same financial troubles as other parts of the company.

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"The insurance subsidiaries are solvent and able to pay their obligations," says Sandy Praeger, president of the National Association of Insurance Commissioners. "In fact, it will likely be the insurance subsidiaries –--or their valuable blocks of business and high-quality assets -- that will be sold in an attempt to return the AIG parent to a more stable financial position.”

For the annuities, the AIG life insurance companies hold substantial assets to back their payment obligations to the Vanguard Lifetime Income Plan fixed annuity contracts, including those indexed to inflation measures, according to Vanguard. And the assets in the Vanguard variable immediate annuities are held in separate accounts that are invested in Vanguard mutual funds and wouldn't be affected by the insurer's financial situation.

If the insurance businesses are sold, then the insurance benefits and annuity payouts should continue to be paid by the new insurer without any disruption.

If the insurance subsidiaries did end up having financial troubles, then the insurance department in the company's home state (New York for many of AIG's insurance subsidiaries) would try to rehabilitate the company. If that didn't work and the company became insolvent, then the state guaranty associations would protect policyholders by continuing the insurance policies and paying claims, up to certain limits.

The maximum limits on protection vary based on the policyholder's state, but every guaranty association must provide coverage for at least $300,000 in life insurance death benefits (per insured life), $100,000 in cash surrender or withdrawal value for life insurance, $100,000 in withdrawal and cash values for annuities, and $100,000 in health insurance policy benefits. Also, "immediate annuity payouts are continued without a break," says Peter Gallanis, president of the National Organization of Life and Health Insurance Guaranty Associations.

Policyholders often receive even more than the guaranty association limits because policyholder claims are given priority over other creditors. "That has happened in a number of cases where either the assets available in the failed company are relatively high compared with the liabilities, or where there's been exceptionally good handling of the estate in the receivership process," says Gallanis. To find out about your state's limits and protections, click on the state associations links at www.nolhga.com.

If a financially strong insurer ends up buying AIG's insurance subsidiaries, your claims could be paid seamlessly. If you're still thinking about switching to another company that isn't in financial trouble, be careful: If you've held a life insurance policy with AIG for several years, buying new coverage now could be a lot more expensive because you're older. And annuity holders could get stuck with a penalty if they switched to another annuity.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.