State Guaranty Associations

State guaranty associations protect the customers of insurance providers in a similar way the Federal Deposit Insurance Corporation (FDIC) protects bank and credit union customers. If you purchase a policy or annuity from an insurance company that becomes insolvent, the state guaranty association steps in to protect customers’ funds up to a predetermined limit set by the state.

Guaranty associations are non-profit organizations regulated by each state rather than federal legislation. Each state’s guaranty association is typically overseen by the state insurance commissioner and an appointed board of directors.

All 50 states have state guaranty associations, as does the District of Columbia and Puerto Rico. Some states maintain separate guaranty associations for life and health insurance policies and for property and casualty policies. The U.S. Virgin Islands also has a guaranty association but only for property and casualty insurance.

Insurance companies must be members of the guaranty association in the states in which they are licensed. If an insurance provider turns insolvent, the state guaranty association will levy an assessment against all other insurance companies selling the same type of product in that state, then use the gathered funds to cover the insolvent firm’s financial obligations.

State guaranty associations may also voluntarily join the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA), which takes in funds from its members to cover policyholders if multi-state insurance providers become insolvent. The legislation that regulates state guaranty associations comes from NOLHGA’s model act which has been modified several times since it was first introduced in 1971.

State guaranty associations offer policy and annuity holders protection up to certain amounts depending on the type of policy or annuity.

In most states, the guaranty association will pay up to $300,000 in claims for life insurance policies and up to $250,000 in claims for annuity contracts. Each state sets its own limits and exceptions. For instance, California’s guaranty association will cover only 80% of an annuity, up to a limit of $250,000, while Connecticut will cover up to $500,00 for annuities.

State guaranty association intervention may not always be required even if an insurance company becomes insolvent. For instance, if an insolvent company sells its insurance and annuity contracts, the financial responsibility for those contracts goes to the purchasing provider instead. Basically, your annuity or policy is transferred to the new company.

State guaranty associations provide a safety net for insurance companies and their customers. Just as the FDIC protects individuals from a bank collapse, state guaranty associations reassure individuals that their annuities, and life and health insurance policies won’t disappear if their insurance company goes broke. That reassurance provides a host of secondary advantages.

Most state guaranty associations offer coverage of at least $500,000 in health benefit plans; $300,000 in life insurance death benefits; and $250,000 in annuity benefits, according to NOLHGA.

The limits for deferred annuity payouts can vary by state, along with the limits for structured settlement annuities – which are often much higher.

Like all investments, it’s important to consult with a financial planner before purchasing an annuity. Your advisor can help you decide which annuity is most appropriate for your retirement goals and plans. Also, insurance companies are not permitted to use their membership in state guaranty associations in their advertising or promotion, so your advisor can also help you figure out what questions to ask.

Editor Malori Malone contributed to this article.