State Guarantee Funds - mention them or not?

[Newby]

It isn't optional for the competitor. By law, to issue policies in a state, you must be a member of that states guaranty association. So, if a carrier failed & wasn't first bought out by another carrier, each remaining carrier licensed in the state will be assessed their share to cover the claims as spelled out in the laws governing the Guaranty Association. This would of course be after the failing carriers assets are sold.

My understanding is an agent can mention it in marketing materials and cannot give the impression that "it is just like FDIC that banks have". However, when asked by a consumer you can explain & can even provide the coverage materials stated on the Guaranty Assoc website materials

By law?

In most states, the law creating the Guaranty Fund addresses mentioning it in marketing. Generally you are prohibited from using it as a marketing tool, however you can discuss it when asked.

Insurance companies can go under, and policyholders can receive less than policy benefits when it happens.

If you are worried about the solvency of a company, you probably don't to place a large portion of your life savings with it. Regardless of the State Guaranty fund.

The same with FDIC, if I'm worried about a bank, I don't care if the FDIC insures it or not. Go ask the people back in 2007-2009 how much fun it was when a bank goes into receivership. While typically the FDIC is pretty good about making it all but seamless for the depositors, it gets very ugly, very quickly when they can't quickly find a new buyer.

That's kind of what I understood about it. You can't use it to sell but you can explain that it exists when asked about companies failing. But you are not to use the existence to make it appear that a less financially stable company is just as safe as a more financially stable company. Each company can only guarantee their policies up to their own ability to pay claims.

A LOT of policies are not a part of the state guarantee program at all. In addition to fraternals there are any company that is using a re-insurer. And also any non-guaranteed parts of any policy which is huge with ULs. The guaranteed illustration on most UL will have them lapsing fairly early in the policy. So even if it's performing better than that, in the event of a company failure it is not covered by any back up program. Dividends on whole-life policies are the same way. Many wealthy people are sold huge WL policies as a part of their estate planning and the dividends are projected (not guaranteed) to carry the policy premium after X number of years. If a person buys a policy out of state or later moves to a state where their particular policy is not available for sale, they are not covered on that policy.

For instance, my office is in Indiana but it's 5-miles from the Kentucky state line and a lot of my Kentucky clients meet with me at my Indiana office. From my understanding if they meet me at my office and buy life insurance or annuities they are not covered by the Indiana OR the Kentucky state guarantee fund. The Indiana fund wouldn't cover them due to they are not an Indiana resident. The Kentucky fund wouldn't cover them if the product they are buying is not approved for sale in KY. And MANY companies are not approved for sale in Kentucky and the ones that are often have a state specific version that is different from Indiana's version.

The main thing is that no insurance policy is guaranteed by any state. They are guaranteed by insurance companies. The insurance industry is REGULATED by the states. Not funded or back up funded by the states.

 

[Allen Trent]

By law?

yes. the state written insurance laws require carriers subject to those laws to be members, but as you have stated, there are many, many other aspects to what carriers & what product types are covered & which are not along with the aspect that only guaranteed aspects of the contracts would be covered:

Guaranty Associations | ACLI.com
nolhga.com :: Frequently Asked Questions

The Indiana fund wouldn't cover them due to they are not an Indiana resident. The Kentucky fund wouldn't cover them if the product they are buying is not approved for sale in KY

I am not 100% certain, but an entirely different state association may actually provide the coverage. The guaranty association of the state they reside in would provide the coverage unless the carrier is not authorized to sell in the residents state. in that case, my understanding is that the Guaranty Assoc in the state the carrier is domiciled would provide coverage. this might be why so many carriers want non-solicitation documents signed when a non-resident buys while crossing into nearby state, etc

 

[somarco]

Insurance companies can go under, and policyholders can receive less than policy benefits when it happens.

Back in the late 70's there were some companies heavily invested in the annuity (qualified plan) business. A couple come to mind . . . Baldwin United (that as I recall had ties to the piano company) and (here's an oldie but a goody) Mutual Benefit.

Both carriers had retirement money "locked up" for 5 years or longer with double digit returns.

Both carriers crashed.

As I recall, no one lost money but those double digit returns were reduced to the guaranteed minimum (maybe 2 or 3%) until the funds could be disbursed.

UL policies also suffered and premiums were ramped up. I believe dividend credits were reduced on par whole life policies.

Fun times.

 

[somarco]

no insurance policy is guaranteed by any state. They are guaranteed by insurance companies.

I thought you weren't supposed to use the word "guaranteed" when discussing insurance unless you are referring to CONTRACTUAL guarantees.

You know, those tables in the back of the policy no one ever reads.

 

[VolAgent]

Back in the late 70's there were some companies heavily invested in the annuity (qualified plan) business. A couple come to mind . . . Baldwin United (that as I recall had ties to the piano company) and (here's an oldie but a goody) Mutual Benefit.

Both carriers had retirement money "locked up" for 5 years or longer with double digit returns.

Both carriers crashed.

As I recall, no one lost money but those double digit returns were reduced to the guaranteed minimum (maybe 2 or 3%) until the funds could be disbursed.

UL policies also suffered and premiums were ramped up. I believe dividend credits were reduced on par whole life policies.

Fun times.

If the state guaranty fund gets involved, the only guarantees are the ones in the law authorizing it. Just ask the folks who bought Penn Treaty policies about that. Yes, this was more health (DI, LTCi, and lawsuit settlements) than life or annuities. But depending on just how bad it is and how much the state is willing to sink into the company, it can get ugly.

Policyholders in Limbo After Rare Failure of Insurer

 

[Newby]

If the state guaranty fund gets involved, the only guarantees are the ones in the law authorizing it. Just ask the folks who bought Penn Treaty policies about that. Yes, this was more health (DI, LTCi, and lawsuit settlements) than life or annuities. But depending on just how bad it is and how much the state is willing to sink into the company, it can get ugly.

Policyholders in Limbo After Rare Failure of Insurer

That confuses me. “The state is willing to sink into the company?”

Why would a state sink anything into an insurance company?

From your article “ Health insurers fought the liquidation, too. State guarantee funds, it turns out, are not funded at all. When an insurance company goes under, all the surviving companies in that line of business are required to chip into the guarantor, with assessments based on their market share.

Long-term-care insurance is classified as health insurance, so health insurers would get the assessment — even the ones that steered clear of long-term-care insurance and never sold a single policy. They were aghast at having to pay for other people’s mistakes.“

 

[VolAgent]

That confuses me. “The state is willing to sink into the company?”

Why would a state sink anything into an insurance company?

From your article “ Health insurers fought the liquidation, too. State guarantee funds, it turns out, are not funded at all. When an insurance company goes under, all the surviving companies in that line of business are required to chip into the guarantor, with assessments based on their market share.

Long-term-care insurance is classified as health insurance, so health insurers would get the assessment — even the ones that steered clear of long-term-care insurance and never sold a single policy. They were aghast at having to pay for other people’s mistakes.“

How much they are willing to spend of their own money and/or assessments against other companies. Even though Pennsylvania was issuing assessments against health insurance companies, I suspect all the administrative and legal costs came out of state funds. And even if it didn't, those assessments are affecting premiums paid by state residents for other health policies.

So yes, once it goes to receivership, just how much money a state is willing to throw at a sinking ship (regardless of whose money it is) will determine the level of benefit policyholders receive.

 

[Newby]

How much they are willing to spend of their own money and/or assessments against other companies. Even though Pennsylvania was issuing assessments against health insurance companies, I suspect all the administrative and legal costs came out of state funds. And even if it didn't, those assessments are affecting premiums paid by state residents for other health policies.

So yes, once it goes to receivership, just how much money a state is willing to throw at a sinking ship (regardless of whose money it is) will determine the level of benefit policyholders receive.

I can promise you States don’t spend one penny of their money (Actually tax payer money) to administer or regulate insurance companies. The Department of insurance does that and that is completely funded by insurance agents and insurance companies not taxpayers.

 

[VolAgent]

I can promise you States don’t spend one penny of their money (Actually tax payer money) to administer or regulate insurance companies. The Department of insurance does that and that is completely funded by insurance agents and insurance companies not taxpayers.

Businesses that pay taxes aren't taxpayers? I realize we do have a lot of businesses that do an amazing job of turning a profit yet not paying taxes (I guess Hollywood has taken over Fortune 500 accounting), but those that do are still taxpayers.

 

[Newby]

Businesses that pay taxes aren't taxpayers? I realize we do have a lot of businesses that do an amazing job of turning a profit yet not paying taxes (I guess Hollywood has taken over Fortune 500 accounting), but those that do are still taxpayers.

The money is not going to come out of the taxes they pay. No taxpayer money is ever going to fund insurance companies.