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Understanding What a Guaranty Association Covers


Consumers and business owners purchase insurance to protect against financial risks. Insurance companies have risks too, though, and there is always a chance the firm will go under or be unable to pay out an insurance claim for some other reason. A guaranty association steps in if an insurance company becomes insolvent and guarantees that company’s policy. Here’s how it works. Want help purchasing life insurance or working on any other part of your financial plan? Consider working with a professional financial advisor.

What a Guaranty Association Is and Covers

An insurance guaranty association is an organization that protects policyholders and their beneficiaries when an insurance company cannot pay a claim. These organizations are authorized by each state’s insurance commissioner to govern and protect policies within their respective states. All insurance companies must be members of the local guaranty association if they are selling policies in that state.

Insurance companies have a crucial role to play in the economy and the financial lives of their stakeholders. Policy owners pay premiums expecting to have their risks covered by the benefits of the insurance. When the insurance company cannot pay, this puts the financial plans of its policyholders in jeopardy.

Paying Claims

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If the insurance company cannot pay a claim, the guaranty association of that state steps in. They assess the other insurance company members within that state that offer the same type of policies to raise money to pay claims. The guaranty association will determine the assessment need based on the money available for the bankrupt insurer and the total claims owed to policyholders. The assessment is based on that deficit and each company’s share of premiums over the prior three years.

Existing Policies Still in Effect

For policies that are still in effect, the guaranty association may provide continued coverage for those policyholders or they may transfer the policy to a healthy insurer. When this happens, the policyholder should continue making payments to keep their policy current. The only change is that payments are sent to a new company.

Are There Limits to What a Guaranty Association Will Cover?

Similar to when a pension benefit guaranty association takes over a bankrupt pension or when the FDIC takes over a failed bank, there will be cuts to some beneficiaries when an insurance company fails. The insurance guaranty association places maximum payouts to each policyholder based on the type of policy and the state’s limits.

While some policyholders and beneficiaries may feel that this isn’t fair, this approach ensures that as many policies are taken care of as possible.

The maximum payouts vary by state, but most states follow the maximum payout limits provided by the National Association of Insurance Commissioners (NAIC) Life and Health Insurance Guaranty Association Model Law.

  • Life insurance death benefits $300,000
  • Net cash surrender or withdrawal value for life insurance $100,000
  • Present value of annuity benefits $250,000
  • Long-term care insurance benefits $300,000
  • Disability income insurance benefits $300,000

In most states, there is a cap of $300,000 in total benefits that a person may receive from the insurer, even if they have multiple policies.

If your coverage benefits are above these limits, you can submit a claim to the guaranty association. Depending on the assets they have available after processing claims, you may be able to receive additional compensation.

The Bottom Line

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Insurance policies are an integral part of any financial plan. As long as you continue making payments, you should feel comfortable knowing that your family is covered. Even if the insurance company should fail before you need to file a claim. The guaranty association of your state is there to protect you and your fellow policyholders in case the insurance company cannot pay its obligations. While your ultimate payout may be lower than your policy amount, you will receive something in case your insurer fails.

Tips for Buying Insurance Coverage

  • The amount of insurance you need varies based on your age, current financial situation and goals. Instead of relying on a general rule of thumb, you should calculate your individual needs based on your personal circumstances. Our interactive life insurance calculator helps you determine how much life insurance you need based on where you live, your income, age and other factors.
  • Buying insurance can be complicated and is best done with the insights and guidance of a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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