State Guaranty Associations
Generally, all commercial insurers that are licensed by a state to issue annuity policies or contracts must be members of the state's insurance guaranty association in order to conduct business in that state. There are insurance guaranty associations in all 50 states, the District of Columbia, and all United States territories. Fraternal and charitable organizations and other entities that issue annuities may be subject to state regulations and statutes depending upon the structure of the organization and the products issued.
A state guaranty association provides protection to policyholders, annuitants, and beneficiaries when an annuity issuer becomes financially unstable. The types of annuities covered by the guaranty fund and the dollar amount of the coverage available vary from state to state. The event that triggers guaranty fund coverage is also defined differently from state to state. Typically, coverage is triggered when the issuer is financially impaired, insolvent, or is no longer paying claim in a timely manner. The triggering event for foreign issuers may be different. For example, coverage may be triggered if a foreign issuer's certificate of authority has been suspended or revoked or if the foreign issuer has been prohibited from accepting or soliciting new business in the state. When coverage is triggered, the guaranty association continues coverage or pays claims out of the fund. Monies in the fund are usually obtained through member assessments.
State guaranty associations generally cover only individual annuity contract holders and their beneficiaries or persons protected by certificates of insurance issued under group annuities. While there are exceptions, most state guaranty associations have a $100,00 maximum liability for the present value of an individual guaranteed annuity contract.
There are at least 10 state guaranty associations that do not extend coverage to a non-guaranteed annuity in which the individual bears the investment risk. These types of annuities are generally known as "unallocated" group annuity contracts. Unallocated group annuity contracts are frequently used in pension and retirement plans. In unallocated group annuity contracts, the contract or group annuity certificate is not issued to or owned by an individual. The insurer, not the government, guarantees any benefits. Typically, premiums and contributions are not immediately used to buy an annuity for the individual plan participant. Instead, the premiums and contributions are deposited in the plan's fund. No part of a premium or contribution is allocated to a particular plan participant. A fund manager or trustee typically allocates the fund monies to various investment vehicles. When the plan participant reaches a specified age (usually retirement age), the insurer is obligated to pay benefits. In those states where unallocated annuities are covered by the guaranty fund, the coverage limits vary. Generally, the minimum liability limit is $1,000,000. A guaranteed investment contract (GIC) is an example of an unallocated group annuity contract.
Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.