Insurance Guarantee Associations

An insurance guarantee association is an organization that insures a group of insurance companies. Each participating insurance company pays a premium to the insurance guarantee association, and this organization pays out insurance settlements to clients of an insurance company that goes bankrupt. The insurance guarantee association provides additional protection to an insurance policy buyer, since a policy holder still receives coverage if an insurer runs out of money.

Participating Insurers

• The insurance companies that participate in the insurance guarantee association have features in common with one another. The California Health and Life Guaranty Association provides coverage to insurance companies that offer various types of health and life insurance to citizens of California. The association may require both the insurance company and the policy holder to reside in the state for this protection to apply to the insurance policy.

State Mandate

• A state can require insurance companies who offer insurance in the state to participate in an insurance guarantee association. In Minnesota, all insurers who sell life insurance, health insurance, accident insurance, or annuities participate in the Minnesota Life & Health Insurance Guaranty Association. States establish rules that limit coverage to residents of a state, unless specific exceptions apply. State associations forbid a policy holder from receiving payments from two different state associations at once.

Direct Purchase

• State insurance guarantee associations provide protection only for a direct policy holder. The association does not pay an insurance settlement when the purchaser buys insurance coverage through a third party such as a fraternal organization, a charity or a health management association. When a group is the beneficiary of an annuity contract, not an individual annuity buyer, the state association also does not offer coverage.

Coverage Limits

• Statutory requirements vary by state, so an insurance guarantee association in one state may pay out more money if an insurer goes bankrupt than an association in another state. The state code which regulates an insurance guarantee association also sets the maximum payout for each type of event, such as $500,000 for health insurance coverage or $300,000 for life insurance coverage. An insurance company can sell a policy that provides a higher level of coverage than the state insurance guarantee association will pay out.

Publicity

• State laws restrict an insurance agent from providing information about a state guaranty association to policy holders. To prevent moral hazard, an insurance agent may not mention this coverage when attempting to convince an individual to purchase an insurance policy. An insurance agent cannot mention the state insurance guarantee association in an advertisement, and cannot provide information from a state association's website to a client.