Life Insurance Guaranty Association: What's The Purpose?

The purpose of the Life and Health Insurance Guaranty Association is to protect policyholders and beneficiaries if an insurance company becomes insolvent or impaired. The association provides a safety net for policyholders, ensuring their claims are covered and they have continued coverage even if their insurance provider goes out of business. It is a state-sanctioned organisation, with all US states, the District of Columbia, and Puerto Rico having insurance guaranty associations. These associations are funded by assessments on insurance companies and are authorised to pay claims up to a specific limit.

Protection for policyholders and beneficiaries

The purpose of the Life and Health Insurance Guaranty Association is to protect policyholders and beneficiaries if an insurance company becomes insolvent or impaired. This is a crucial safety net for those with insurance policies, as it ensures that their claims will be covered even if their insurance provider goes out of business.

In the United States, insurance companies are regulated by individual states and are not protected by federal bankruptcy laws. Therefore, state insurance commissioners are responsible for reviewing the financial health of insurance companies operating in their state. If an insurance company is deemed financially unstable, the commissioner will determine the steps the company must take to reduce its risk over a reasonable time frame, known as the rehabilitation period. If the company still fails to meet its financial obligations, it is considered insolvent, and the state insurance commissioner, the state insurance guaranty association's board, and the courts decide how to pay the covered claims of the insurer.

The Life and Health Insurance Guaranty Association is funded by assessments on insurance companies and is authorised to pay claims up to a specific limit. This includes claims for death benefits, disability benefits, and health insurance benefits. They also pay claims for annuity contracts, but the limits are typically lower than for life insurance and health insurance policies.

The Association provides continued coverage for the policyholder or transfers policies to healthy insurers. They may also use the remaining assets of the insolvent company to help pay covered claims. This protection is available to all US states, the District of Columbia, and Puerto Rico.

State-sanctioned organisations

Insurance guaranty associations are given their powers by the state insurance commissioner, who is charged with reviewing the financial health of insurance companies operating in their state. If an insurance company is deemed insolvent, the commissioner, the state insurance guaranty association's board, and the courts must determine how to pay the covered claims of the insurer.

The guaranty association's coverage of insurance company insolvencies is funded by post-insolvency assessments of the other guaranty association member companies. These assessments are based on each member's share of premium during the prior three years.

All US states have an insurance guaranty association, and insurers are required by law to be members of the guaranty association in the states in which they are licensed to do business. Most states have two types of guaranty associations: a life and health guaranty association, and a property and casualty insurance guaranty association.

The Illinois Life and Health Insurance Guaranty Association, for example, provides protection for life, health, and annuity policies owned by Illinois residents. It was created by Illinois law to protect Illinois policyholders against certain insurance company insolvencies.

Overall, insurance guaranty associations are state-sanctioned organisations that protect policyholders and claimants, ensuring their claims are covered if an insurance company becomes insolvent.

Annual fees

The guaranty association's coverage of insurance company insolvencies is funded by post-insolvency assessments of the other guaranty association member companies. These assessments are based on each member's share of premiums during the prior three years. The assessed insurers are granted an offset on state premium taxes in most states, allowing them to recover a portion of the assessment over time.

The amount of coverage provided by the guaranty association varies by state and is set by state statute. While coverage limits differ, many states follow the National Association of Insurance Commissioners' (NAIC) Life and Health Insurance Guaranty Association Model Law. This model law specifies coverage amounts for various types of insurance, including life insurance death benefits, net cash surrender or withdrawal values for life insurance, present value of annuity benefits, long-term care insurance benefits, and disability income insurance benefits.

The guaranty associations are responsible for ensuring that policyholders are paid up to the stated guarantee limits. If more funds are needed than can be raised in a single year, the associations have several options. They can issue bonds to raise additional funds or impose permanent policy or contract liens, reducing the coverage below the payout cap.

Overall, the annual fees assessed to members of the Life and Health Insurance Guaranty Association are crucial for funding the association's operations and ensuring it can carry out its duties of protecting policyholders in the event of insurance company insolvencies.

Coverage for individual life, health, annuity and supplement policies

An Insurance Guaranty Association is a state-sanctioned organisation that protects policyholders and claimants in the event of an insurance company's impairment or insolvency. All US states have one, and they are funded by the money they collect from conducting assessments of member insurers.

The coverage provided by guaranty associations differs from state to state, but most states offer at least the following amounts of coverage:

• $300,000 in life insurance death benefits
• $100,000 in net cash surrender or withdrawal values for life insurance
• $250,000 in the present value of annuity benefits, including cash surrender and withdrawal values
• $500,000 in benefits for a payee or beneficiary of a structured settlement annuity
• $300,000 in long-term care insurance benefits
• $300,000 in disability income insurance benefits

In most states, there is a cap of $300,000 in total benefits for any individual with one or multiple policies with the insolvent insurer.

Continuation of coverage

If an insurance company becomes insolvent, a guaranty association may provide continued coverage for the policyholder. This is done by transferring policies to another insurance company or through the association itself.

In the case of the liquidation of an insurance company, the guaranty association in the policy owner's state of residence will provide coverage, regardless of where the policy was purchased. If the guaranty association does not cover the policy owner because the insurer is not a member company, the association in the state where the insolvent insurer is domiciled will provide coverage in most cases.

If a guaranty association becomes responsible for covering a policy, it can provide this coverage in several ways. For example, a financially sound insurer may take over the insolvent company's policies and assume responsibility for continuing coverage and paying covered claims. Alternatively, the guaranty association may provide coverage directly by continuing the company's policies or issuing replacement policies to the policy owner.

In the case of an insolvent life insurer with policyholders in multiple states, the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) coordinates the activities of the various guaranty associations. NOLHGA provides resources and technical expertise to state guaranty associations and offers a national forum for discussing state guaranty association issues.

Frequently asked questions