FAQs: General info

If an insurance 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. This process is called receivership (the commissioner is now considered the company’s Receiver), and at this point, the company is in rehabilitation. Policyholders are notified by the insurance department if their company is placed in rehabilitation, and in this stage, the company usually still pays claims.

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 to issue a liquidation order with a finding of insolvency, which gives the Receiver permission to close down the company and sell its assets to pay its debts (this is often called liquidation or insolvency, and it’s similar to a company declaring bankruptcy). Again, you will be notified if your insurance company is placed in liquidation.

Liquidation also triggers the state life and health insurance guaranty associations to provide coverage to policyholders of the failed company.

Life and health insurance guaranty associations were created to protect policyholders (the owners of life, health, and annuity policies) and beneficiaries of policies issued by life or health insurance companies that have gone out of business (see Question 1, above). Many guaranty associations also provide coverage for Health Maintenance Organizations (HMOs)—you should check with the state guaranty association where you live to confirm whether it does so (click here for a list of guaranty association websites and contact information). All 50 states, the District of Columbia, and Puerto Rico have a life and health insurance guaranty association.

Almost all insurance companies (and HMOs, in many states) licensed to write life and health insurance or annuities in a state are required to be members of the state’s life and health insurance guaranty association. If an insurance company goes out of business, the guaranty associations of the states where the company was a member continue coverage and pay claims under the company’s covered policies in accordance with state laws.

Guaranty associations typically are activated to continue coverage and pay claims when a company licensed to write business in the state goes out of business (which is known as liquidation or insolvency).

When an insurance company or HMO that is a member of the guaranty association is being liquidated, the guaranty association provides protection to all eligible policyholders in the state who own covered policies (coverage is determined by the state’s guaranty association law).

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. If the company is not a member of your state’s guaranty association, the guaranty association in the state where the company is domiciled (the company’s “home state”) will provide coverage in most cases. In determining coverage, a person can be a resident of only one state.

In most state laws, there are special rules for determining which guaranty association will provide coverage for structured settlement annuities (see Product Coverage, Question 3) and “unallocated annuity contracts” (See Product Coverage, Question 8). In the first instance, the guaranty association in the state of residence of the payee will provide coverage for a structured settlement annuity. In the case of an unallocated annuity contract owned by an employee benefit plan, the guaranty association in the state where the plan sponsor has its principal place of business will provide coverage.

In the case of a non-natural person (such as a corporate or other entity), residency typically will be determined by a “principal place of business” test.

Under the laws of most states, U.S. citizens living outside the United States or in territories without a guaranty association are usually covered by the guaranty association in the company’s state of domicile (the company’s “home state”).

If your policy requires you to pay premiums to your company, you must continue to do so even after your company is placed into liquidation if you wish to keep your coverage. Those premiums go to the guaranty association providing you with continuing coverage, and if you stop paying premiums, your insurance benefits may be terminated.

You should contact your state insurance department for assistance locating an insurance company. The National Association of Insurance Commissioners (NAIC) website offers a Life Insurance Policy Locator Service for help in locating life insurance policies and annuity contracts of a deceased family member or close relationship.

You can also find information on companies that have gone out of business in the Insolvent Insurance Companies section.

The guaranty association laws of each state spell out what types of insurance products are covered. Generally, individual and group life, health, and annuity policies or contracts are eligible for coverage. Certain types of life, health, and annuity policies may not be covered. As an example, some states do not cover unallocated annuity contracts (see Product Coverage, Question 8). In addition, exclusions or limitations on coverage may apply (for instance, guaranty association coverage does not extend to non-guaranteed portions of policies and contracts).

It’s best to contact your state’s guaranty association with any specific questions about coverage.

Much like FDIC protection for bank accounts, state guaranty associations provide benefits up to a specific amount (for guaranty associations, this amount is 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 following amounts of coverage:

• $300,000 in life insurance death benefits
• $100,000 in cash surrender or withdrawal values for life insurance
• $250,000 in present value of annuity benefits, including 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

Some state laws vary—you can check your state’s guaranty association’s website to confirm the benefit levels in your state.

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.

Guaranty associations cover the value of your policy up to the limits spelled out in state law (see Question 10, above). If your policy benefits are less than or equal to the guaranty association benefit level in your state, your policy will be fully covered. If your policy benefits are more than the guaranty association benefit level, you will receive at least the benefit level guaranteed by your state guaranty association. In most states, any amounts above the guaranty association benefit level become a claim against the estate of the insolvent insurer.

Coverage is applied on the basis of an individual life:

• For a life insurance contract, the “life” is the individual whose death triggers the payment of a death benefit.
• For an income (also known as a “payout”) annuity contract, the “life” is the annuitant; however, for a deferred annuity contract, the “life” is the owner. (See Product Coverage, Question 1a, for an explanation of income annuity contracts and deferred annuity contracts.)
• For a health insurance policy, the “life” is the individual whose life is insured against loss due to ill health.
• Under most state laws, there are special rules for applying coverage benefit levels for structured settlement annuities (principally based on the payee or payees listed in the contract) and unallocated annuity contracts (see Product Coverage Questions 3 and 8).

Coverage is determined based on the policy terms, state laws, and other factors as of the date a guaranty association is activated for an insurer—this is usually the date an order of liquidation is entered against the insurer.

Guaranty association coverage acts as a “floor” and not a “ceiling.” If your policy benefits are less than or equal to the guaranty association benefit level in your state, your policy will be fully covered. If your policy benefits are more than the guaranty association benefit level, you are guaranteed at least that level of coverage. In most states, any amounts above the guaranty association benefit level become a claim against the estate of the insolvent insurer.

Here’s an example: If you have an annuity providing for $300,000 in present value of annuity benefits and the benefit level in your state is $250,000, you are limited to $250,000 in benefits from your state’s guaranty association. The remaining $50,000 may become a claim against the estate of the insolvent company.

In most states, some of the company’s remaining assets go toward paying these claims. In this example, if the company’s liquidation collects enough assets to cover 70% of policyholder claims, you would receive $250,000 in guaranty association coverage and $35,000 (70% of $50,000) from the company’s estate, for a total of $285,000.

If the insolvent company’s estate has no assets remaining (which is unusual), the guaranty association coverage would be the only benefits you receive.

Guaranty association coverage levels are applied separately for each insolvent insurance company. As a result, coverage in one company insolvency will not reduce or eliminate coverage in another company’s insolvency.

In many situations, your guaranty association will work with other state associations to develop a plan to provide protection for the failed company’s policyholders. This protection can be provided in different ways:

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 most states, any amounts above the guaranty association benefit level become a claim against the estate of the insolvent insurer. Any benefits above that level may be funded from the failed company’s remaining assets (see Question 12, above). In addition, the Receiver (the state insurance commissioner overseeing the insolvent insurer) may seek to negotiate a transfer of some of the benefits above the guaranty association coverage level to a financially sound insurer.

You will receive a notification from the Receiver (typically appointed by the state insurance commissioner overseeing the insolvent insurer) and/or the state guaranty association if your company is found to be insolvent.

A separate set of state guaranty funds provides protection for property and casualty insurance claims, such as homeowners, workers compensation, automobile, etc. Contact the National Conference of Insurance Guaranty Funds with questions about this type of coverage.