Today, I have a similar internal flinch whenever I mention annuities or whole life insurance in a column. I know that comments from insurance salespeople casting aspersions on my IQ and my character will start whizzing into my inboxes.
Admittedly, I am no fan of most “investment” products sold by life insurance companies. I believe most life insurance companies do a great service providing low-cost term life insurance and a big disservice promoting high-cost, low-return investment products. Life insurance salespeople disagree with me about my views, and they let me know it.
Recently I wrote a column with the premise that, outside of a FDIC guaranteed bank account of up to $250,000, there is no “guaranteed” investment. My point was that only the Federal Reserve Bank, which owns the ability to create dollars at will, can be the ironclad guarantor of any dollar based investment. I flinched when I included annuities and whole life insurance in my list of non-guaranteed investments.
Predictably, commenters told me I was wrong, that insurance companies routinely guarantee their returns on fixed annuities and cash value life insurance. Knowing that a guarantee is only a good as the company behind it, I dismissed the comments until one brought up a point I had not considered.
This person wrote, “If an insurance company goes bankrupt the South Dakota Guaranty Association guarantees payment up to $250,000.” He is right; any annuity licensed to be sold in South Dakota is guaranteed for up to $250,000 per company by the South Dakota Life & Health Insurance Guaranty Association (SDLHIGA). If you own three annuities, each worth $200,000, issued by the same company, only $250,000 is covered by the SDLHIGA.
What is the SDLHIGA? It’s a private association created by the SD legislature comprised of every life and health insurer licensed in South Dakota. All 50 states have similar associations. The SDLHIGA is not a state agency, nor does is have the power to access any state funding.
If an insurance company that sells annuities or any life, health, disability, or long term care insurance files for bankruptcy, the SDLHIGA can ultimately take over funding the obligations of the policies. Payments are subject to a cap of between $100,000 and $500,000, depending upon the type of policy. You can view a complete list of the types of insurance covered and the limits here or call the SD Division of Insurance at 605-773-3563.
While not a government guarantee, the SDLHIGA guarantee is certainly strong, as it is backed by all the member insurance companies. The downside to the guarantee is that your money will be “locked up” while the bankruptcy and receivership process wends its way through the courts. It could take at best months and often years before you would be able to receive your proceeds.
You may wonder why you’ve never heard of the SDLHIGA. That is because SD law prohibits insurance agents and their companies from using the guarantee in any advertising or as an inducement to buy life insurance products.
Despite the guarantees offered by the SDLHIGA, it’s still important that you protect yourself by researching potential investment products and only buying from financially sound companies. Guarantees are no substitute for doing your own due diligence as part of taking responsibility for your own financial well-being.