Many people accept lower rates from bank CDs and taxation of their interest because they know the money has the backing of the FDIC. However, most people don’t realize that annuities offer the same type of protection for their investors in the event of the insurance company insolvency.

Both the FDIC and the State Guaranty Funds are the protectors of the consumer when it comes to insolvency of financial institutions. Insurance companies receive protection from The State Guaranty funds. Guaranty funds are in place for all types of insurance companies, whether they are property and casualty or life and health. The life and health guarantee association protects annuity owners.

 

 

 

 

The name of the funds, state guaranty funds, might sound a bit deceiving. While every state has and operates their own fund, there is a National Organization of Life and Health Insurance Guarantee Associations. Most insurance companies operate in many different states. If the state declares a company insolvent, the National Organization of Life and Health Insurance Guarantee Associations, NOLHGA, helps coordinate the efforts as a national safety net for protection of the consumers throughout the country.

You may wonder how it all works. It is very much like the FDIC. The insurance departments of each state monitor the finances of every insurance company of the state. If the insurance department notes that a company is in financial trouble and doesn’t have enough money to pay its obligations, the commissioner of the state steps in and attempts to help the company get back on track. The process is the rehabilitation period.

Sometimes, very seldom because of close monitoring, rehabilitation doesn’t work and the state declares the company insolvent. At that point, the commission requests the state court to order the company liquidated. The state’s insurance department then changes its control from rehabilitator to liquidator. It acts like an estate administrator for a deceased company, paying creditors and claims against the company.

Throughout the process, the state’s life and health insurance guarantee association works with the commissioner in the process. Of course, since most insurance companies operate in several states, the effort to save the company or process after insolvency receives coordination from the national organization.

If reorganization and rehabilitation doesn’t work, then the guarantee funds make certain the policyholders of their state receive coverage up to specific amounts. The action is quite similar to that of the FDIC. If you’d like a list of the amount of coverage for your state, simply go to the Guarantee Association Laws section at the NOLHGA site, (Hyperlink guarantee association laws section to http://www.nolhga.com/factsandfigures/main.cfm/location/stateinfo ) look for your state in the drop down menu and then click on benefit limits.

Every state has different laws and regulations, so some of the states offer more coverage than others do. Normally the benefits for the states are $300,000 in life insurance death benefits, $100,000 if you withdraw or surrender a life or annuity policy for its cash value and $100,000 of benefits from health insurance. Many states cap the total amount a person receives at $300,000 but it is higher in some states.

The coverage comes from the state guarantee funds. That money comes from the other insurance companies that operate in the state. The state guaranty fund calculates the amount of money necessary to cover all claims. It then places an assessment on all the other companies that operate within the boundaries of the state. They base the assessment on the amount of premium each company collects in that state.

The state guarantee funds makes certain that all claims to policyholders receive coverage and may even transfer policies from a dying insurance company to a healthy one so there’s no interruption of coverage. By doing this, no policyholder is without a company or coverage. It provides stability for people that don’t wish to cash in their policies but want to make certain they won’t lose their funds.

NOLHGA, the National Organization of Life and Health Insurance Associations, also helps the cost of investigating and evaluating insurance companies with problems. Since the formation of the NOLHGA in 1983, states no longer have to have their own team of experts or legal team. Most insurance companies today, operate in several, if not all states. The NOLHGA provides their expertise if a company is in financial trouble. This saves the state from the need to hire overlapping financial experts and legal staff. The coordinated effort also helps the policyholders by providing a quick resolution to the problem.

Because of all the safeguards, annuity owners receive far more protection from loss than those that invest all their funds in bank products. Besides the guarantee of funds, they also have the potential to have their policy transferred to a stronger insurance company without any interruption. The transfer of policies is an additional aid for people that don’t want to cash surrender their annuity but continue it on a tax-sheltered basis.

Investing smart, not scared is always the right way to invest. While many people invest in bank CDs and savings because they feel the products are safer than fixed annuities, they really need to look at all the facts. Neither the FDIC nor the state guaranty funds receive funds from the government. Unlike most people believe, the government doesn’t give the funds to the FDIC to pay for failed banks. The money comes from the insurance premiums each bank pays and from interest on the government bonds it holds. While the initial funds came from the government to start the FDIC, which they repaid long ago. While the process is slightly different, it functions much the same as the state guaranty funds.

Knowing all the facts helps to understand, both bank products and insurance products receive the same type of guarantees. Once you acknowledge that fact, you can invest in the one that suits your needs best, whether you have a time frame to meet, want tax-deferred income or taxed income, or simply want the highest return.