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Q: What does the market turmoil mean to me as the owner of a life insurance policy or annuity?
A: Life insurance policy and annuity owners should remain fully confident in the ability of their insurance companies to honor all their obligations. Insurance companies are required to invest premiums conservatively so they can withstand economic fluctuations or sudden and numerous claims for benefits.
With $5 trillion in assets at the end of 2007 and more than $281 billion in surplus -- representing assets above and beyond what they are required to have to meet their obligations -- the industry is among the strongest financially in the nation. Life insurers are ready to meet their obligations to life insurance and annuity owners despite the current market turmoil.
Q: How can I determine the financial strength of my insurer?
A: You can check any company's financial condition by looking at its rating. Rating agencies, including A.M. Best Company, Fitch Ratings, Moody's Investor Services, Standard and Poor's Insurance Rating Service, and Weiss Ratings, assess the financial strength of companies. Rating information is available online or in publications usually found in the business section of your public library.
Q: Can a life insurance company’s drop in stock value affect its ability to pay claims on its life insurance or annuity policies?
A: A drop in the price of a stock reflects a snap-shot perspective of a company's growth potential and does not provide a good picture of an insurer's claims-paying ability. Assets backing an insurer's promises are held in what is known as a general account. State insurance regulators require insurers to keep enough assets in these accounts to meet their obligations to policyholders. These requirements are not affected by a company’s stock price.
Q: Should I consider replacing my policy if I’m with a company that is reported to be in financial difficulty?
A: Consumers should carefully consider all options before replacing an existing life insurance or annuity policy with one from a different company. While in some cases this may make sense to do, it’s important to talk to a trusted insurance or financial advisor about what is best for you given your financial situation. The National Association of Insurance Commissioners has information on their website for consumers who may be thinking about replacing a policy.
Q: What happens in an insolvency?
A: Insolvencies of life insurance companies are rare. When an insurer's financial condition deteriorates to the point where it may have trouble meeting its obligations, it is placed into receivership (e.g., conservation, rehabilitation, liquidation). In effect, the company is taken over by the insurance commissioner of the state where the insurer is domiciled. Acting in the best interest of policyholders, the commissioner may need to establish a plan to ensure policyholders receive coverage and/or benefits. For example, the commissioner may allow other insurers to purchase parts of the troubled insurer’s business. In this case, the life insurance policy and annuity owners will simply become customers of the new insurer, with no change in their coverage or benefits. If a company is liquidated, a state guaranty association may need to assume or reinsure policies of a failed insurer.
Q: What exactly are guaranty associations?
A: Guaranty associations are financial safety nets established for each line of insurance (life/health and property/casualty, respectively). In the rare instance where an insurer fails and an insurance commissioner decides to liquidate the company, state guaranty associations become involved to provide continuing coverage and benefits to their resident policyholders. State laws require insurance companies to be members of the guaranty associations in every state in which they are licensed to do business. Guaranty association coverage includes both group and individual policies. For more information, see ACLI’s Insurance Guaranty Association FAQ.
Q: Are variable annuities and variable life insurance covered by guaranty associations?
A: Variable annuities and variable life have two components, guaranteed benefits and investments. Guaranteed benefits are those that the insurer is obligated to provide regardless of financial conditions or market trends. Investments, on the other hand, are tied to the ups and downs in the financial markets. Because guaranty associations are involved in the business of insurance, they only cover guaranteed benefits. A guaranteed death benefit offered in a variable annuity would be covered by a guaranty association, as well as a death benefit guaranteed in a variable life insurance policy. However, the variable elements in these products reflecting fluctuations in the stock market would not be covered by guaranty associations.
Q: Are my retirement savings, provided by a life insurer, covered by guaranty associations?
A: The guaranty association laws of each state describe what is covered. In general, these laws protect the guaranteed features of insurance products offered by life insurers to fund 401(k)s, 403(b)s and IRAs. However, not all states cover every product. Contact your state guaranty association with any questions about coverage.
Q: Who should I contact with insurance-related questions fueled by the market turmoil?
A: If you have questions relating to an individual policy, your agent or life insurance company is a good place to turn to. Life insurance companies and agents understand the concerns raised by the current market turmoil and are ready to respond to all questions from their customers. If your questions relate to your retirement savings, your employer's benefits officer could be helpful. Or, the insurer providing your plan is a good source for information.