Guaranty Associations
Guaranty Associations were created by state legislatures to protect life, annuity and health insurance policyholders and beneficiaries of an insolvent insurance company. All insurance companies licensed to write life or health insurance or annuities in a state are required, as a condition of doing business in the state, to be members of the guaranty association. If a member company becomes insolvent, money to continue coverage or pay claims is obtained through assessments of other insurance companies writing the same kinds of insurance as the insolvent company.

What Do Guaranty Associations Cover (as it relates to annuities)
They do not cover any portion of a policy in which investment risk is borne by the individual, such as a variable annuity, and they may or may not cover guaranteed investment contracts (a/k/a GICs) or unallocated annuity contracts purchased by retirement plans as a funding vehicle for participants, and they do not cover fraternal benefit society obligations. Every state (plus Puerto Rico) provides at least $100,000 in withdrawal and guaranteed cash values for all other annuities. Thirty three states (and one District) have higher limits: (last update 22 December 2011)

Guaranty associations limit protection to residents of their own state. You are covered if the failed insurer was licensed in your state of residence. Policyholders who reside in states where the insolvent insurer was not licensed are covered, in most cases, by the guaranty association of the insolvent insurer’s state of domicile. Individuals should check with their resident state for current limits or changes.

If The Insurance Company Fails
Insurance companies are regulated by the state governments of the individual states where they are licensed. When a state determines that an insurer is insolvent the state guaranty associations are activated. When there is a shortfall of funds needed to meet the obligations to policyholders, the remaining member insurers doing business in a particular state are assessed a share of the amount required to meet the claims of resident policyholders. The amount member insurers are assessed is based on the amount of premiums they collect in that state on the kind of business for which benefits are required. In 1983 the state guaranty associations founded the National Organization of Life and Health Insurance Guaranty Associations (www.nolhga.com). If the insolvency affects three or more states NOLHGA coordinates the development of a plan to protect policyholders.

"every holder of a covered life insurance, annuity, or non-cancelable health insurance policy who has made the required premium payments has been given the opportunity to have the policy assumed by another healthy carrier or had the covered portions of their policies fulfilled by their guaranty association itself" from http://www.nolhga.com/insolvencycorner/main.cfm/location/fundamentals

Research by Advantage Compendium Ltd. indicates that in the last fifteen years there was only one failed carriers that did not provide all of the annuity value for all of their annuity customers; owners of annuities issued by London Pacific Life did receive up to guaranty limits but account amounts above those limits may never be fully paid. There may be other carriers out there that have not returned a hundred cents on the annuity dollar, but we could not find them.

So, How Safe Is My Money?
Annuity guaranteed cash values up to state guaranty funds limits – at least $100,000 – have been protected when an insurer fails. Is an annuity as safe as an FDIC insured bank account? No, because federally insured is by definition superior to a state guaranty. But the real question is not whether FDIC is safe; it is whether money inside a fixed annuity is also safe.

From 2000 through 2011 there were 446 bank failures. CD deposits within federal deposit insurance limits were protected; the same did not hold true for account balances over the insurance limits in many of these banks and not every uninsured account was made whole.

During the same period customers of one interstate carrier that offered annuities received cash from state guaranty funds. Every state guaranty fund covered at least $100,000 of cash value in the event of carrier insolvency, and Advantage Compendium found only one failed carriers that did not provide all of the annuity value for all of their annuity customers – an even better record for the period than FDIC for this period.

This does not mean the failed carriers paid out money immediately. When the state takes over an annuity carrier a hold is usually placed on withdrawals and this hold can last as long as the carrier is in receivership. In addition, guaranty funds relies on assessments made on other insurers to cover the costs of a failed carrier, which means it can take awhile, sometimes years, before a covered annuityowner is made whole.

How Strong Is The Carrier
There are private rating agencies that evaluate the ability of insurers to meet their obligations.

• A.M. Best Company (www.ambest.com) is the leading provider of ratings for the insurance industry.

• The Fitch Ratings Insurance Group (www.fitchibca.com) provides ratings and research on insurance companies worldwide.

• Moody’s (www.moodys.com) provides financial strength ratings for life insurance companies.

• Standard & Poor’s (www.sandp.com) provides ratings and research on insurance companies.