In this environment it is fair for families to question whether or not the insurance that they have paid into for years and years will be there when they need it. The upheaval of the financial services industry which sparked the demise of Bear Stearn's, Lehman Brothers, Fannie Mae, Freddie Mac Merrill Lynch and AIG, the first insurer to go off the board, is sparking fear amongst the owners of insurance policies and it is quite understandable.
While Senator's Obama and McCain are running around trying to make political hay from the situation by blaming this person or that for the problems we find ourselves in, many of us are looking for real answers to real questions that will affect our lives and our families. We're not looking for a promise to do this or that that will probably be forgotten in a week or two.
So lets clear a few things up.
State laws are designed to protect the interest of policyholders first, before investors. The number one job of state insurance regulators is to make sure that the insurance companies that operate within their state are financially sound. If there is the possibility that a company will not be able to fulfill the promises it made to it's policy holders, the regulators will step in.
The regulators have numerous actions they can take to prevent failures. This includes taking over management of the insurance company through a conservation or rehabilitation order with the goal of being able to get the company back into a strong financial position.
Claims from individual policyholders are given priority over other creditors. In the event that there is not enough money in the insurance companies accounts to pay a claim, the state has a safety net in place to protect the consumer and it's called the state guaranty fund.
Every state has a fund of this type. Insurance companies pay for the fund with a fee of 1-2% of the net insurance it sells in that state. So every state is different. If an insurance company is unable to pay a claim, the guaranty fund will pay instead subject to certain limits. These limits are different for every state but upon investigation $300,000 for property casualty and $500,000 for life insurance and annuity contracts seem to be the norm.
Each state has its own plan though and it can vary substantially from those limits I mentioned above. For instance, some states don't cover annuity benefits at all, and some do. Some may have a limit per person, or a limit per policy so someone may own three policies and get paid for all three.
It is important to remember that these do not replace your current policy, more so back up your policy with another type of substitute coverage. If you have a $2,000,000 life insurance policy, you may only collect $500,000 if the state is required to use the state guaranty fund to pay you.
Client's assets invested in variable annuity separate accounts are not subject to creditors and are segregated by law and protected although still subject to market performance.
Fixed annuity accounts and all fixed products are invested in the insurer's general account and subject to creditors. These assets may be used upon the approval of state regulators for liquidity concerns of the insurance company.
Death benefits on both annuities and life insurance are funded in part by the insurers' general account and may be reduced if the insurer goes into receivership.
If there was ever a time to educate yourself about your state's policies for paying a claim from the state's guaranty fund, it is now. Insolvency is an unfortunate reality. Things may calm down or may get worse. I will not be the one to predict that, but I want all to understand that when it comes to your ability to collect a claim from a troubled insurance company, your state has an option and it's best to understand your states particular rules and claims paying practices.
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