Millions of Americans own annuities and many of them depend on annuities as an important part of their retirement portfolio. However, with the current financial crisis reaching historic proportions, a lot of folks are understandably confused and scared that their annuities could be in danger.

As you may know, an annuity is a contract, generally between you and a life insurance company. You typically enter into the annuity with a lump sum. In exchange, you receive periodic payments from the company, and the return you make on your invested money is usually tax-deferred.

There are good and bad annuities, but the right ones can help guarantee income in your retirement for as long as you live, even if your other assets run out.

No wonder, then, that so many people are worried about the safety of their annuities in the midst of all this financial turmoil. We're here to set the record straight for you.

The Good News: You're Annuity Is Probably Fine

Many listeners to our weekly national radio show and members of our Dolans.com family have asked about the status of their annuities with troubled AIG.

The good news is that the AIG subsidiary that sells their annuity products doesn't appear to be in any peril. It's very similar to a situation in 2002 when CONSECO (a holding company) declared bankruptcy. CONSECO subsidiary insurers were never taken over by state regulators and continued to operate throughout the re-organization process.

And there's more good news as it relates to the current "safety" of annuities.

If your annuity company encounters financial trouble and you're in the payout phase with your fixed annuity (from AIG or otherwise), the payments will likely continue.

However, it's possible that, if the potential buyer's court-appointed receiver determined that the initial interest rate is too high, they could be successful in obtaining a court order to allow a lower rate…which would obviously reduce your payments.

For variable annuities, the assets underlying your annuity contract are segregated from the general assets of the insurance company. That means that your annuity would be easy to value and your investments would remain market-sensitive. (That's not necessarily a good thing. We HATE variable annuities and recommend, if annuities are appropriate for you, that you stick with fixed annuities. Find out why here.)

Your annuity is also protected by the "legal reserve," which refers to the strict financial requirements that must be met by an insurance company to protect money paid in by policyholders…reserves that, at all times, must equal the withdrawal value of every annuity account.

Finally, your annuity is protected by your state's pool. If an insurance company fails, generally, all other companies doing business in your state would take over your annuity.

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