US policyholders’ insolvency safety net

A question being asked by an increasing
number of US consumers is: What happens if my life insurer goes
bankrupt? The answer has been provided by the National Organization
of Life and Health Insurance Guaranty Associations (NOLHIGA), a
voluntary association made up of the life and health insurance
guaranty associations of all 50 states, the District of Columbia,
and Puerto Rico.

According to NOLHIGA when a life insurance company encounters
financial difficulty and is unable to meet its obligations, the
insurance commissioner in the company’s home state initiates a
process dictated by the laws of the state whereby every attempt is
first made to help the company regain financial stability. This
period is known as rehabilitation.

If it is determined by the relevant state insurance commissioner
that the company cannot be rehabilitated, the commissioner requests
the state court to order the liquidation of the company and seeks
authority to seize its assets and operate the company pending
rehabilitation or liquidation.

Once a liquidation is ordered, the state’s guaranty association
provides coverage to the company’s policyholders who are state
residents.

While laws governing maximum limits and types of policies covered
vary from state to state, most states set basic limits of:

• $300,000 in life insurance death benefits;

• $100,000 in cash surrender or withdrawal value for life
insurance;

• $100,000 in withdrawal and cash values for annuities; and

• $100,000 in health insurance policy benefits.

State insurance guaranty associations are funded by insurers doing
business in that state.

Insurers are assessed on the amount of premiums they collect in
that state with assessments set at 2 percent of premiums in all but
fours states. The exceptions are Alabama, California, Colorado and
Florida – where assessments are based on 1 percent of
premiums.

Since the formation of the NOLHGA in 1983, state guaranty
associations have provided protection to more than 2.2 million
policyholders in more than 60 multi-state insolvencies, guaranteed
more than $21.2 billion in coverage benefits and contributed $4.4
billion to ensure that policyholders received their benefits.