After the AIG insurance mess: When to worry

Should you worry that your insurance company will be the next AIG?

In a word, no. Insurance experts we've interviewed say the insurance giant was singular in its heavy reliance on mortgage-backed securities.

In fact, AIG policyholders themselves need not worry that their claims will be denied. That's because the AIG that got into trouble was a holding company, totally separate from its subsidiaries that pay claims on homeowners, auto, life, and other types of insurance. Those companies are regulated heavily by the states in which they're domiciled. By law, they must have enough in reserve to pay all their claims, according to the National Association of Insurance Commissioners, the professional organization for state insurance regulators.

As a further protection, state insurance regulators have the right to take over a subsidiary that is in trouble and keep it going in the interest of policyholders. According to Robert Hunter, insurance director for the Consumer Federation of America and former Texas insurance commissioner, insurers must by law pay outstanding claims to policyholders—at full value—before any other creditors can step in.

Finally, state guaranty funds, themselves funded by the insurance industry, are available to pay insurance claims. Every state has a limit on how much it will pay per policy; the minimum for any policy is $100,000. Click here for a map that will lead you to your state's insurance department, where you can check out your state limits. If your company were to get into the kind of trouble that required digging into a state guaranty fund, you might have to wait for your money, but you'd eventually get it.

For the most part, Hunter recommends viewing your insurance coverage the same way you always did. With auto, home, umbrella, and term life policies, you always have the option of moving to another company within a year if you're not happy with the service or want less costly coverage. Check financial ratings from companies like A.M. Best and Weiss Ratings, as well as information from Consumer Reports.

Fixed annuities are considered like insurance, and are protected by the same regulations as regular insurance, the NAIC says. While it's always possible that AIG could sell its subsidiary that administers those annuities, policyholders would notice no change except that the correspondence would come from a different company.

If you've got a variable annuity and want to bail, the stakes are higher. Hunter says you'll need to weigh the cost of paying the policy's surrender charges with potential losses you've already suffered. If you've just purchased the policy a few years ago, those surrender charges could wipe out the premiums you've paid. Waiting longer means you could lose more, but your surrender charges also would  gradually decline.

Returns from variable annuities, which combine a life insurance component with an investment component, will suffer along with the the rest of the market. "If you're into stocks you're exposed to downside," Hunter says. "But that you knew when you bought it. It's an investment."—Tobie Stanger