The Prudential Regulation Authority (PRA) has proposed raising the Financial Services Compensation Scheme (FSCS) limit for annuities to cover 100% of the fund in the event of an insurer failure.
PRA said the long-term locked-in nature of annuities meant that many policyholders had a lower capacity to protect themselves or seek alternative cover.
It also said policyholders were, in particular, dependent on annuity payments as part of their regular income and could be affected by any delays or missed payments.
The PRA added that the proposal to increase the compensation limit reflected the potential for significant adverse consequences to policyholders of cover being disrupted.
Currently, customers who buy long-term insurance, including pensions and life assurance, can claim 90% of the value of the fund against firms declared in default, with no upper limit.
The increase will also include pure protection, claims arising from death or incapacity and professional indemnity insurance, the PRA noted.
PRA chief executive Andrew Bailey said: 'These proposals will allow customers to have continuous access to the money in their bank account - or receive payment from the FSCS if this is not possible.
'Additionally, the increase in FSCS limits for certain types of insurance will mean policyholders who may find it difficult to obtain alternative cover, or who are locked into a product, have greater protection if their insurer fails.'
The new rules will take effect from July next year.
