State Insurance Guaranty Funds
I have covered the topic of insurance company failure several times but it keeps coming up. Since it’s a common concern for the majority of annuity buyers then a different perspective might help put it all together. I’m not going to repeat myself in regards to company failure but you can go back and read that at the link below if you missed it.
Newsletter: What If an Insurance Company Goes Bankrupt
Podcast: What If an Insurance Company Fails
Instead, I want to explain the operation of state insurance guaranty associations and how that may or may not affect you. I’ve known since the beginning of my career that we are not allowed to use the existence of a guaranty association to sell insurance products. It’s written in a law in each state that looks something like the language below.
No person, including a member insurer, agent, or affiliate of a member insurer may make, publish, disseminate, circulate, or place before the public, or cause directly or indirectly, to be made, published, disseminated, circulated, or placed before the public, in any newspaper, magazine, or other publication, or in the form of a notice, circular, pamphlet, letter, or poster, or over any radio station or television station, or in any other way, any advertisement, announcement, or statement, written or oral, which uses the existence of the insurance guaranty association of this state for the purpose of sales, solicitation, or inducement to purchase any form of insurance or other coverage covered by the xxstatexx life and disability insurance guaranty association act…
You gotta love lawyers because it could be said a lot easier. Agents may not use the guaranty fund in advertisements or a sales pitch as an enticement to buy an insurance contract. We are not allowed to use it and I don’t. But that doesn’t mean we can’t talk about it.
The reason we can’t use it is because it doesn’t really matter. The insurance company is responsible for insuring your contract and the state association is partial insurance for the company itself. The state has no contract with you specifically. And it doesn’t matter anyway so long as you choose a solid company.
I’m not sure whether most people understand a very important part of this. The state of domicile takes control of an insurance company facing hardship and it may eventually involve every other state in which the company does business. Assuming a company does business in all 50 states, that’s 50 individual insurance commissioners who all have to sit down and come to an agreement.
That type of party takes a long time to organize and schedule. In the highly unlikely event that it gets there, it takes years to materialize. Most people with an annuity won’t be around to enjoy the proceedings. Annuities would probably all be cashed out by then.
There is a reason why now is a good time to talk about this again. We just had another natural disaster with Hurricane Ian in Florida and that gives us a good example of how a state guaranty fund might be used. I’ve gotta give credit to Steve and his flying boat for the featured photo this week. He got lucky when the storm surge took his boat off the lift and set it to rest on the pylons. It could just as easily have ended up out to sea and at the bottom of the ocean.
Insurance company losses because of this hurricane are estimated to be upwards of $40 billion. It’s a catastrophic loss for many companies and that’s what the guaranty fund is for. I’ve not heard that any specific companies can’t handle the claims in this case but it is the type of case where you would see it happen. If any company can’t pay a contractual claim because of a catastrophic loss then the state fund will step in to help out.
Annuities do not lead to catastrophic losses for insurance companies, natural disasters do. You should never buy an annuity based on the existence of the state guaranty fund. I suppose it’s a nice little thing to see but it’s more or less irrelevant. Click the podcast page at the top and watch the video if you want a little more detail and commentary.