State Guaranty Associations

The safety of investments is paramount to consumers. When Americans entrust their savings to money in federally regulated banks, their deposits are insured by the Federal Deposit Insurance Corporation.

That’s not the case with annuities, which are legally considered insurance products issued by insurance companies rather than banks. But that doesn’t mean customers are without protection. Instead of federal protection, individual states provide the protection similar to the FDIC.

That’s because insurance companies are regulated on the state level. State regulators monitor insurance companies’ finances and impose financial standards. They require corrective action when the companies’ fail to meet the standards, and they collect money from companies’ when needed to cover customer losses.

Each state, as well as the District of Columbia and Puerto Rico, has what’s known as a guaranty association, which is a nonprofit that insures consumers in the unlikely event that their insurance companies fail and default on investments. Every insurance company licensed in a particular state is legally required to belong to that state’s guaranty association.

Insurance companies are legally required to belong to guaranty associations in the states where they operate. The associations are funded by money from the member insurance companies. That money is used to pay claims when a member company fails.

However, the coverage may not be necessary because often when an insurance company becomes insolvent, the company’s contracts are purchased by other insurance companies. So customers still have the same insurance and annuity contracts worth the same amount of money, only from different companies.

In addition to annuities, these associations cover life insurance policies, long-term care policies and disability income insurance policies. Most states have a cap of $300,000 in total benefits for any individual customer with one or more policies with the failed insurance company, according to the American Council of Life insurers.

Each state determines the limits of coverage. But every state covers at least $250,000 in the present value of annuity benefits, including net cash surrender and net cash withdrawal values. Puerto Rico covers $100,000. Some states cover more, as much as $1 million in the case of New York, according to the National Organization of Life & Health Insurance Guaranty Associations. The coverage amounts are specified by a model law created by National Association of Insurance Commissioners.

The coverage limits are per customer, per company. For example, say a state coverage limit was $250,000 and a person owned $1 million in $100,000 annuities at 10 different companies. If three of the companies became insolvent, the coverage would be for $300,000 because the coverage limit would apply to each company’s policy.

If all the policies were with one company that became insolvent, the customer would have $250,000 in protection. However, if the policy types were different, there may be some flexibility and possibly more protection.

If a customer seeks benefits above the limit, the customer is eligible to file a priority claim against the insurer. Such claims may be paid until all the company’s assets are liquid.