State Life and Health Guaranty Associations – The Basics
Life and health guaranty associations are organizations created by state law to protect policyholders and beneficiaries against loss in case of insurance company insolvency. The members of an association are all insurers licensed to write life or health insurance or annuities in the state. If a member insurer becomes insolvent, the guaranty association will assess the other members to assure the claims of the insurer’s policyholders living in the state are paid. However, the protected policyholder benefits are subject to limits set out in each state’s law.
Presently, nearly all jurisdictions have a state guaranty association. The provisions governing the associations vary from state to state. Questions about a specific state should be addressed to that association. Your local state insurance commission office can advise you whom to contact. For the purpose of this article, we will describe the provisions of the 1987 Model Act developed by the National Association of Insurance Commissioners (NAIC).
Under the 1987 NAIC Model Act, each guaranty association is responsible for its own residents. This provision is intended to encourage every state to adopt an association, thereby expanding the overall capacity of the system to fund insolvency. Conversely, if a guaranty association of the state in which an insolvent insurer is domiciled was responsible for all policyholders no matter where located, the assessment procedure would be strained by a major insolvency.
An older Model Act, the 1970 NAIC Model Act, did require the guaranty association in an insolvent insurer’s domicile state to cover all policyholders, whether resident or nonresident. Approximately 14 states still have guaranty association laws covering both residents and nonresidents. California and New York guaranty association laws cover residents only.
Under the 1987 Model Act, nonresidents may be covered in the following circumstances:
- The insolvent insurer is a member of a guaranty association in its domicile state (State “X”);
- The insurer has never held a license in the nonresident policyholder’s state of residence (State “Y”);
- The nonresident’s state of residence (Y) has a state guaranty association; and
- The nonresident policyholder’s guaranty association (Y) does not provide coverage for the loss.
Under the above circumstances, the non-resident policyholder would be covered by the State X guaranty association.
Extent of Coverage
The 1987 Model Act limits covered losses. No more than $300,000 will be paid to an individual. In addition, there are separate limits for life, health, and annuity coverage. The maximum covered amounts are: $300,000 life insurance death benefit; $100,000 net cash surrender value of a life insurance policy; $100,000 in health insurance benefits; and $100,000 in present value of annuities.
To the extent benefits are dependent on a credited interest rate they are adjusted. Contract benefits will be adjusted for the four-year period prior to the date the association becomes responsible for losses. The maximum credited interest rate for the four years can’t be more than 2% less than the Moody’s Corporate Bond Yield Average for that period. Once the association becomes responsible for losses, future covered benefits will be calculated using a credited interest rate equal to 3% less than the Moody’s rate.
The ability of the guaranty association to assess its members may affect a policyholder’s recovery. Each state law sets a limit on the amount a guaranty association can assess against its members; A typical figure is 2% of premiums collected in the state for the year. A guaranty association located in a state where relatively small amounts of premium are collected annually will be limited in its assessment and, therefore, may not have adequate funds to cover all losses of policyholders in the state.
The Model Act prohibits a person, either in writing or orally, from using the existence of a guaranty association to sell, solicit or induce the purchase of life insurance. The Act provides a penalty for doing so. It may be tempting to respond when a prospective buyer states an alternative investment is “protected”; for example, a CD by the FDIC, but you must resist the temptation.
Last Updated: 9/23/2012 10:05:00 PM