How You’re Protected
Learning that your life or health insurance company is in trouble can be alarming, but policyholders can take comfort in knowing that state guaranty associations are there to provide protection and continuing coverage.
Since NOLHGA was created in 1983, state guaranty associations have provided protection to more than 2.85 million policyholders, guaranteed more than $25.88 billion in coverage benefits and paid more than $9.2 billion directly to policyholders.
What Happens When an Insurance Company Fails?
Insurance is regulated by the states—each state has an insurance department that oversees the financial stability of companies doing business in that state. When a company experiences financial troubles and can’t meet its obligations to policyholders, the insurance commissioner in the company’s home state (also called the domiciliary state) steps in to help the company try to recover financially.
A receivership is a court proceeding, and the judicial process is governed by the state’s court system. Each state requires that the insurance commissioner be appointed the “Receiver” of the insurer to administer the receivership under court supervision.
In the first stage of receivership, called rehabilitation, the Receiver steps in to help the company try to recover financially. If efforts to rehabilitate the company succeed, the receivership process ends. However, if the company’s financial troubles are too severe to resolve, the Receiver asks a state court for permission to close down the company and sell its assets to pay its debts. This is called liquidation or insolvency, and it’s similar to a company declaring bankruptcy.
It’s important to note that policyholders will always receive 100% of their covered policy benefits up to the guaranty association’s coverage limit (in most states, coverage of more than one policy is subject to an aggregate limit per person). Policies with benefits higher than the guaranty association’s coverage limit may have a claim to receive a share of their benefits from the remaining assets in the liquidated company. Also, the guaranty association in the policyholder’s state of residence at the time the company is ordered into liquidation generally provides coverage, regardless of where the policy was originally purchased.
What Is a Guaranty Association?
Guaranty associations operate in all 50 states, Puerto Rico, and the District of Columbia, and they play a crucial role in safeguarding policyholders when their insurance company goes out of business. Guaranty associations protect policyholders in their state if an insurance company fails (also known as insolvency or liquidation). They don’t sell insurance, but most insurance companies licensed to sell life, health, or annuity policies in a state must be members of that state’s guaranty association.
State life and health insurance guaranty associations were created to do three things:
Continuing Coverage
State guaranty associations step in when an insurance company fails. Their primary goal is to provide continuing coverage for policyholders of the failed insurer. This ensures that even if the original company goes out of business, policyholders still have insurance protection.
Benefit Protection
Guaranty associations also work to protect the benefits due to policyholders. They honor the terms of existing policies (up to the legal limit) and prevent disruptions for those relying on insurance coverage. In more than 40 years, the guaranty associations have never failed to pay a covered claim.
Quick Protection
Guaranty associations collaborate through the National Organization of Life & Health Insurance Guaranty Associations (NOLHGA) to protect policyholders quickly and efficiently. NOLHGA helps coordinate efforts across states when dealing with large-scale challenges caused by national insurance company failures.
How Guaranty Associations Work
Even before an insurance company is liquidated, the guaranty associations usually work with the insurance department and the Receiver on a plan to protect policyholders. Once liquidation is ordered, the plan goes into effect, and the guaranty associations step in to provide coverage for policyholders who are residents of their state. This coverage is provided up to the limits set by state laws.
If the liquidated company lacks sufficient funds to meet its policyholder obligations, each state guaranty association uses a combination of the company’s remaining assets and funds contributed by member insurers in the state (called assessments) to pay claims and continue coverage. These assessments are based on the premiums collected by each insurer in that state for the type of insurance policy in question.
If your policy has benefits above your guaranty association’s limit, that doesn’t mean you lose those benefits. In most states, those amounts become a claim against the estate of the failed insurer, and they may be paid in part by the company’s remaining assets.
Guaranteed Coverage
Much like FDIC protection for bank accounts, state guaranty associations provide benefits up to an amount specified in state law (any benefits above that level may be funded from the failed company’s remaining assets).
Most state guaranty association laws are based on a “Model Act” created by the National Association of Insurance Commissioners (NAIC), and most associations provide at least the coverage amounts listed to the right:
Some state laws vary—you can check your state association’s website to confirm the benefit levels in your state.
Some states cap the total benefits for an individual life in any one insolvency at $300,000 or $500,000, regardless of how many policies you have with the company. Also, the guaranty association in the policyholder’s state of residence at the time the company is ordered into liquidation generally provides coverage, regardless of where the policy was originally purchased.
$300,000
in life insurance death benefits
$100,000
cash surrender or withdrawal values for life insurance
$250,000
in present value of annuity benefits, net cash surrender/withdrawal values
$500,000
in major medical or basic hospital, medical and surgical insurance policy benefits
$300,000
in long-term care insurance policy benefits
$300,000
in disability insurance policy benefits
$100,000
in other health insurance benefits
Continuing Your Coverage
When an insurance company fails, policyholders often worry about losing their coverage—especially if they purchased their life or health insurance policy years or even decades ago. Fortunately, in addition to paying claims, the life and health insurance safety net also includes a crucial feature: continuing coverage.
If your policy gives you the right to continue coverage, you can do so—even if your company fails. Guaranty associations honor the terms of your policy (up to the benefit limits mentioned above) as if the insurance company were still in business. They do this by either:
Transferring Policies
Guaranty associations sometimes transfer policies—even those for people who might now be uninsurable—from the insolvent company to a financially stable insurer.
Paying Claims
In some cases, guaranty associations manage the policies and pay claims themselves.
In either case, you’ll still have coverage through the safety net provided by the guaranty associations.
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