So far, no one has lost any death benefit from life insurance. In general, policyowners are protected in two ways. First, smaller insolvent companies are taken over by larger, more secure companies that assume the obligations of the smaller company to its policyowners.
Second, in the event, an insurer fails (and its obligations are not assumed by another company), policyowners have one primary source of protection, the state “guaranty fund.” To help protect policyowners in the event of insolvency, most states maintain guaranty funds for life and health insurers.
When necessary, the guaranty fund intervenes to pay insurance claims, settle policy surrenders, etc. Most state guaranty funds set an upper limit of $100,000 for life insurance cash values or annuities and $300,000 for death benefits. (The state insurance department of an individual state can provide information about the terms of the state’s guaranty fund.) These limits are quite generous when compared to the banking and savings and loan industries’ deposit insurance programs.
However, the state guarantee system is not without its problems. Some states’ guaranty funds are unfunded, relying essentially on current contributions from other insurers in the state to pay claims as they arise. If several large companies experience difficulties at the same time, it could, at worst, overtax the remaining insurers and force the guaranty fund to leave some claims unpaid or, at best, force the guaranty fund to defer the payment of claims, perhaps for years.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM