By Kimberly Lankford
Kiplinger's Personal Finance
Sunday, September 28, 2008

Q My husband and I hold life insurance policies with American International Group, 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?

AAIG'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 because 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 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.

"The insurance subsidiaries are solvent and able to pay their obligations," says Sandy Praeger, president of the National Association of Insurance Commissioners.

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 to help the AIG parent company, then the insurance benefits and annuity payouts should continue to be paid by the new insurer without disruption.

If the insurance subsidiaries 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 the company became insolvent, then the state guaranty associations would protect policyholders by continuing the insurance policies and paying claims, up to certain limits.

To find out about your state's limits and protections, click on the state associations links at http://www.nolhga.com.