The thought of insurance company safetyprobably doesn't come to mind. But withthe ratings services downgrading severalcompanies, and with some companies declaringbankruptcy, it may be something for physicians toconsider. On the positive side, life insurance andannuity contracts are offering better protectionthan most other investments.
There are 2 ways that policyholdersare protected. The first is separate accountsof variable life and annuity contracts.These are separate from the claimsof any creditors of the insurance company.These funds are invested throughinvestment firms that offer funds specifi-cally designed for use in these contracts.Even in the event the insurance companyfails, these are protected. Often, theinsurance department in the state in which thecompany is located will appoint a stronger companyto manage the failed company's policies. Duringrestructuring, holders of variable life contracts maybe limited in taking loans, but can always cash intheir policies at the current market rate.
Second, funds in fixed-annuity and standardcash-value policies are held in what is called thecompany's general account. The company investsthese funds to be able to pay guaranteed interestand other guaranteed amounts to policy owners. Allcompanies located in a particular state pay into theguarantee fund, and the fund then provides protection.Most states cover claims of up to $100,000 incash values and up to $300,000 in death benefits.Because in most cases the state insurance departmentwill appoint a stronger company to administerthe failed company's accounts, the guaranteefund doesn't always have to step in.
In some cases, the state regulators may step inand administer the company. Typically,death benefit claims are paid immediately,but if the guarantee fund becomesstretched, requests for cash values maybe delayed for up to several years.
A state's guarantee fund protects itsresidents, regardless of the state in whichthe company is located. But if the companywas doing business in a state whereit was not authorized, there will be noprotection. New York is a classic example.Since New York's regulations aresomewhat stringent, some policy ownerswish to be covered under them. To becovered by the New York guarantee fund, your policymust be issued by a company licensed in NewYork to a resident of the state. So a policy ownerwho moves to New York has protection under theNew York fund only if the insurer for their currentpolicy was or is currently licensed to do so. Formerresidents of New York are also covered if they moveto another state, as long as the insurer was licensedin New York at the time the policy was issued.
If the policy owner's state guarantee fund doesnot cover a claim, the guarantee fund in the state ofthe insurance company's location may cover it. Thepolicy owner would have to call that state's departmentof insurance to determine what is available.
If your insurance company gets into trouble, itmay be going through liquidation or rehabilitation.In liquidation, the company ceases operationsand the courts appoint a liquidator. Thestate's guarantee fund in the state of domicile mayhave to step in and administer any outstandingclaims and collect all outstanding premiums owedto the liquidated company. The time this takes canvary, but it could be up to several years or more.
Under rehabilitation, the insurance departmentin the state of domicile will take over the operationof the company and attempt to keep it operatinguntil it is in shape to sell. This will keep the companyin a position to continue to pay claims andcollect premiums. The insurance department willoften appoint a trustee to operate the company.
During rehabilitation, dividends and interestpaid on policies from the general account of thecompany are typically paid, but the rate can bedropped to the guaranteed rate as stated in thepolicy. Variable contracts, though, will continueto be credited with earnings based on the movementof the market. It is important to checkyour insurance and annuity contract to see whatguaranteed rate is stated in the policy. Underrehabilitation, this is the lowest rate you couldexpect to receive.
Check Your State's Regulations
For more information, contact the NationalOrganization of Life and Health Insurance GuarantyAssociations (703-481-5206; www.nolhga.com).
Patrick J. Flanagan
a financial planner and
insurance consultant located
in Point Pleasant,
NJ. He welcomes questions
or comments at