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Guaranty Associations
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were created by state legislatures
to protect life, annuity and health insurance policyholders and
beneficiaries of an insolvent insurance company. All insurance companies
licensed to write life or health insurance or annuities in a state
are required, as a condition of doing business in the state, to be members
of the guaranty association. If a member company becomes insolvent, money
to continue coverage or pay claims is obtained through assessments of
other insurance companies writing the same kinds of insurance as the
insolvent company. |
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What Do Guaranty Associations
Cover (as it relates to annuities)
They do not cover any portion of a
policy in which investment risk is borne by the individual, such as a
variable annuity, and they may or may not cover guaranteed investment
contracts (a/k/a GICs) or unallocated annuity contracts purchased by retirement plans
as a funding vehicle for participants, and they do not cover fraternal
benefit society obligations. Every state (plus Puerto Rico)
provides $100,000 in withdrawal and guaranteed cash values for all other annuities
(California covers 80% of annuity contractual value to a maximum payout of $100,000).
Sixteen states (and one District) have higher limits:
Arkansas - $300,000 in the present value of
annuity benefits, including net cash surrender and net cash withdrawal values
Connecticut - $500,000
per contract owner
Delaware - $250,000
DC - $300,000 in the present value of
annuity benefits, including net cash values
Iowa
- $250,000 (maximum $300,000 on one individual)
Minnesota -
$130,000 (adjusted for
inflation) in annuity net cash surrender and withdrawal values
New York - Aggregate liability shall
not exceed $500,000 for all benefits, including cash values, with respect to any one life
North Carolina - With respect to any
one individual: $300,000 for all benefits, including cash values
Ohio
- $250,000
Oklahoma
- $300,000 in the present value of
annuity benefits
Oregon
- $250,000
Pennsylvania
- $100,000 ($300,000 in the present value of
annuity benefits)
South Carolina - No liability with
respect to any portion of a covered policy to the extent that the benefits to
any one person exceed an aggregate of $300,000
Utah - $200,000 in present value of
annuity benefits, including net cash surrender
Virginia
- $100,000 ($250,000 in IRA)
Washington
- Life/disability and annuity claims are paid subject to the policy limit or
the guaranty association limit of $500,000 –
whichever is less
Wisconsin - Aggregate obligation of
the fund on a single risk, loss, or life may not exceed $300,000
Guaranty associations limit protection
to residents of their own state. You are covered if the failed insurer was licensed in your state of
residence. Policyholders who reside in states where the insolvent insurer was
not licensed are covered, in most cases, by the guaranty association of the
insolvent insurer’s state of domicile. Individuals should check with their
resident state for current limits or changes.
If The Insurance Company Fails
Insurance companies are regulated by the
state governments of the individual states where they are licensed. When a state determines that
an insurer is insolvent the state guaranty associations are activated. When
there is a shortfall of funds needed to meet the obligations to policyholders,
the remaining member insurers doing business in a particular state are assessed
a share of the amount required to meet the claims of resident policyholders. The
amount member insurers are assessed is based on the amount of premiums they
collect in that state on the kind of business for which benefits are required.
In 1983 the state guaranty associations
founded the National Organization of Life and Health Insurance Guaranty
Associations (www.nolhga.com). If the insolvency affects three or more states
NOLHGA coordinates the development of a plan to
protect policyholders.
"every holder of a covered life insurance, annuity, or non-cancelable health insurance policy who has made the required premium payments has been given the opportunity to have the policy assumed by another healthy carrier or had the covered portions of their policies fulfilled by their guaranty association itself"
from http://www.nolhga.com/insolvencycorner/main.cfm/location/fundamentals
Research by Advantage Compendium Ltd. indicates that in the last
fifteen years there were only three failed carriers that did
not provide all of the annuity value for all of their annuity
customers; owners of annuities issued by London Pacific Life, National American Life Insurance Company
of Pennsylvania and Summit National Life Insurance did receive up to guaranty
limits but account amounts above those limits may
never be fully paid. There may be other carriers out there that have not
returned a hundred cents on the annuity dollar, but we could not find them.
List Of Annuity Carriers In Receivership
So, How Safe Is My Money?
Annuity guaranteed cash values up to state guaranty
funds limits – usually $100,000 – have been protected when an insurer fails.
Is an annuity as safe as an FDIC insured bank account? No, because federally
insured is by definition superior to a state guaranty. But the real question is
not whether FDIC is safe; it is whether money inside a fixed annuity is also safe.
From 1994 through
2009 there were 236
bank failures. CD deposits within federal deposit insurance limits were
protected; the same did not hold true for account balances over the insurance
limits in many of these banks and not every uninsured account was made whole.
During the same period customers of a
little over a dozen interstate carriers that offered annuities received cash from state
guarantee funds. Every state guaranty fund covered at
least $100,000 of cash
value in the event of carrier insolvency, and Advantage Compendium found only
three failed carriers that did not provide all of the annuity value for all
of their annuity customers – an even better record for the period than FDIC.
This does not
mean the failed carriers paid out money immediately. When the state takes over an
annuity carrier a hold is usually placed on withdrawals and this hold can last
as long as the carrier is in receivership.
How Strong Is The Carrier
There are private rating agencies that
evaluate the ability of insurers to meet their obligations.
A.M. Best Company (www.ambest.com)
is the leading provider of ratings for the insurance industry.
The Fitch Ratings Insurance Group (www.fitchibca.com)
provides ratings and research on insurance companies worldwide.
Moody’s (www.moodys.com) provides
financial strength ratings for life insurance companies.
Standard & Poor’s (www.sandp.com)
provides ratings and research on insurance companies.
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