Insurance is not a bank deposit
Bank customers know the FDIC standard: deposits are insured to at least $250,000 per depositor, per ownership category, at each FDIC-insured bank. The FDIC states that it does not cover non-deposit investment products such as annuities, even when a bank sells them. Insurance policies have a separate safety net: state guaranty associations, created by state law and funded by the insurance industry itself.
Guaranty associations are the last line of defense, used only after state regulators have tried to rehabilitate a troubled company. Coverage is triggered when a court finds an insurer insolvent and orders it into liquidation. For background on the receivership process, see what happens when an insurer fails.
Two separate systems
- Life and health. Every state, the District of Columbia and Puerto Rico has a life and health insurance guaranty association, 52 in total. They are coordinated by the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA).
- Property and casualty. State P&C guaranty funds pay covered claims for auto, home, liability, workers' compensation and other lines. The National Conference of Insurance Guaranty Funds (NCIGF) supports them. NCIGF traces the system's origins to 1969 and says it has paid more than $35 billion in claims from about 600 insolvencies.
Typical coverage limits
Limits are set by each state's law. NOLHGA publishes these typical benchmark levels for life and health coverage:
| Type of benefit | Typical limit |
|---|---|
| Life insurance death benefits | $300,000 |
| Life insurance net cash surrender or withdrawal values | $100,000 |
| Annuity benefits (present value) | $250,000 |
| Basic hospital, medical and surgical or major medical | $500,000 |
| Long-term care and disability income | $300,000 |
| Other health benefits | $100,000 |
Some states are more generous. NOLHGA notes that Connecticut, New York and Washington set most categories at $500,000, while California covers 80% of certain values. In most states there is also an aggregate limit per person across several policies with the same failed insurer.
On the property and casualty side, NCIGF says most states cap claims at $300,000. These caps generally do not apply to workers' compensation claims. State funds also refund part of the unearned premium. In Indiana, for example, the refund is the lesser of 80% of the paid but unearned premium or $650 for each remaining month.
Which state's association pays
For life and health policies, the association that generally provides coverage is the one in the policyholder's state of residence when the insurer is ordered into liquidation. Where you bought the policy does not matter. P&C rules follow the state law of the fund involved. Courts commonly allow about one year from the liquidation order to file a claim, according to the Indiana guaranty association, so read the receiver's notice carefully.
How the associations are funded
Guaranty associations are not funded by taxpayers. NOLHGA explains that claims are paid from the failed company's remaining assets plus assessments on the other insurers licensed in the state. Each insurer's share is based on the premiums it writes there. Most P&C funds assess after an insolvency. NCIGF reports that in most states the annual assessment cap is 2% of net direct written premium.
What is not covered
- Amounts above the limits. If an annuity is worth $300,000 and the limit is $250,000, the remaining $50,000 becomes a claim against the failed company's estate. Payment from the estate may be partial and can take years.
- Surplus lines. Non-admitted (surplus lines) insurers are outside the system. The NAIC confirms that guaranty fund coverage is not available for them.
- Risk retention groups. The federal Liability Risk Retention Act precludes RRGs from joining state guaranty funds.
- Self-insurers. Employers and plans that self-insure are generally outside the guaranty fund system.
How to use this safety net wisely
- Do not choose an insurer because of guaranty coverage. Check financial strength first. Our guide on how to check insurer reliability explains ratings and complaint data.
- If you are placing a large annuity or cash-value policy, consider spreading it among insurers so each contract stays within your state's limits.
- Ask whether a business policy is written by an admitted insurer or in the surplus lines market.
- Confirm your state's exact limits on the association's own site, linked from NOLHGA or NCIGF.