Guaranty Associations: A Critical Consumer Protection You’ve Probably Never Heard Of

Aug 30, 2019

It’s common knowledge that the Federal Deposit Insurance Corporation (FDIC) provides deposit insurance coverage if a bank fails and is unable to meet its obligations. FDIC signs are prominently displayed at every bank to let us know that our deposits are guaranteed for up to $250,000 per person per account category.

The financial crisis of 2008 reminded us that while our banking system as a whole is financially sound, banks can, and do fail. 

It’s comforting to know that if that happens, the FDIC will protect your savings.

But what about when you buy a life insurance policy or an annuity? Or a long-term care or disability income insurance policy? Would you be covered if the insurer that sold you any of these products fails?

The answer is yes. In a manner similar to the FDIC, you would be covered by your state’s life and health insurance guaranty association. 

However, most of us are unaware of this protection because state laws prohibit insurers and agents from advertising their guaranty associations during the sales process (though most states require insurers to distribute guaranty association notices when insurers’ policies and contracts are delivered).

As a result, most people have never heard of guaranty associations, let alone their coverages. All of the state guaranty associations provide at least $300,000 in coverage for life insurance death benefits, $250,000 for annuity benefits, and $300,000 each for long-term care insurance and disability income insurance benefits.

And contrary to some inaccurate assertions in a recent Bloomberg column, any coverage within these limits is every bit as safe as a bank CD. The column claims – without proof or examples – that state guaranty associations “don’t pay policyholders promptly or in full.” In fact, guaranty associations pay out claims promptly and in full accordance with state laws. 

So, while you won’t see a “Guaranty Association” sign displayed at a life insurer’s office or next to an agent, you can rest assured that the policy or contract  you bought is protected in the unlikely event that your insurance company fails. 

Wayne Mehlman

Wayne Mehlman is Senior Counsel, Insurance Regulation at the American Council of Life Insurers (ACLI). His primary responsibilities relate to receivership, guaranty association and corporate governance issues, as well as product standards. He joined ACLI in 2005.