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Is It Safe? AIG Crisis Could Affect Annuities

Annuity sales rose during the first half of 2008. That quickly changed during the second half, when many policyholders cashed in their plans fearing the company might collapse. AIG ended the year with a 2.7% surrender rate, up 42% from 2007 and more than double the 1.1% average for the market.

AIG maintains its capital and surplus positions by collecting premiums. If the company loses more policyholders or fails to attract new investors, it could face problems. This year has been so volatile that AIG probably lost more policyholders.

AIG's life insurance units took in $53 billion in premiums and lost $24 billion. The losses far exceed the group's $15 billion in net capital and surplus. In contrast, Hartford Financial Services (HIG - Get Report) lost $4.5 billion and kept $6 billion in capital, and MetLife (MET - Get Report) lost $632 million and took in $18 billion.

The Treasury Department said last week it would extend bailout funds to life insurance companies. The government stands behind AIG, but it might consider selling its units to keep the company going and protect policyholders. However, the government might struggle to find an owner who doesn't want to change policyholders' contract terms. At the least, customers might have to work with a new company.

It's important to buy annuities only from financially sound companies. If the company fails while you're paying into your annuity, you will receive the value of the account. However, if the firm becomes insolvent while you're collecting income from your policy, you'll receive only what's covered by guaranty associations, an amount that varies by state.

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