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May 16, 2022 at 06:10 PM
What You Need to Know
- Banks tell customers about the FDIC.
- Broker-dealers tell their clients about SIPC.
- Annuity issuers typically talk about their guaranty funds only when customers get the contracts.
If you buy a certificate of deposit or open a checking or savings account at a bank, you are told that your deposit is backed by the U.S. government through the Federal Deposit Insurance Corporation (FDIC).
If you open an account with a broker-dealer, you are told it belongs to the Securities Investor Protection Corporation (SIPC).
If you buy an annuity or life insurance product, however, typically you are told nothing about any financial backup beyond the financial strength of the issuing life insurer.
Wait, it gets more confusing for the consumer.
If they buy the annuity, when they receive the physical annuity contract, they may find a technically worded disclosure about something called a guaranty association or guaranty fund. In many states, this is likely the first time that the consumer has heard about such an organization.
Why wasn’t the consumer told about the existence of the fund and what it covers as part of the buying process?
For reasons considered important to the insurance regulators and many in the insurance industry, state laws and regulations have imprisoned the guaranty fund in a bottle and only let it out once a consumer buys the product.
Why are guaranty funds treated in this manner?
Guaranty Fund Background
Guaranty funds are one of the best kept secrets in the life and annuity insurance industry.
Unfortunately, guaranty fund coverage is poorly explained and poorly understood, and current public policy casts a shadow instead of sunshine on this valuable consumer protection.
In an increasingly fluid marketplace, the insurance industry operates at a competitive disadvantage compared to banks and securities firms, which as noted above are not prohibited from mentioning the existence of FDIC and SIPC protections during the sales process.
Guaranty funds are nonprofit legal entities created under state laws to provide coverage if the issuing life insurer becomes impaired or insolvent and is unable to pay its policy benefits.
The basic life insurance and annuity coverages, which vary by state, are $300,000 in life insurance death benefits ($100,000 in net cash surrender or withdrawal values), $300,000 for disability income insurance or long-term care insurance, and $250,000 in the present value of annuity benefits.
Guaranty funds receive their financial support from assessments against all life insurers writing business in their state.
In these times of high inflation, there is no formal mechanism in the state laws for indexing these coverage amounts for inflation or otherwise adjusting the limits.
Instead, the National Association of Insurance Commissioners (NAIC) sporadically revisits the issue of coverage limits as part of the model law revision process.
It takes years, however, for changes to work their way through the state-by-state approval process, and to be formalized and implemented.
Harry N. Stout has been the president of Fidelity & Guaranty Life, deputy chief executive of Old Mutual Financial Network and managing director of Insurance Insight Group. He is host of the “
Bruce H. Saul is the principal of Saul Consulting Services, a consulting practice focused on financial services regulation. His experience includes partnership in a business law firm, chief counsel roles at leading life and property-casualty insurance companies, and service as a senior analyst at the Federal Insurance Office.