Every state has a life and health insurance guaranty fund that provides insurance coverage for policy holders in the event that an insurance company becomes insolvent. State guaranty funds insure various types of insurance policies, including annuities, but the extent to which these contracts are protected varies from state to state.
State guaranty funds are operated by guaranty associations, and these entities are comprised of insurance companies that operate in a particular state. The insurance companies in each state have to pay regular insurance premiums to the guaranty fund, and those premiums pay for the insurance coverage that the fund provides. Neither the state nor the federal government backs these funds. Consequently, when you buy an annuity you are told that the safety of your money depends on the continued financial strength of the insurer, because if that insurer fails you only get some of your money back if all the other insurers stay solvent and continue to pay state guaranty fund premiums.
State guaranty funds protect you from losses on a per person, per insurance company basis. Each state has a limit for annuity protection, and your insurance payout cannot exceed that amount regardless of how many policies you had with that company. Any funds you receive in the form of an annuity insurance payout also go towards your maximum insurance protection level. The maximum insurance protection reflects the total amount that you can claim from the state guaranty fund to cover losses tied to all types of insurance policies that you held with the failed insurer.
Every state insures annuities for at least $100,000 per contract owner. Therefore, if you own a contract jointly with your spouse, the guaranty fund provides you with at least $200,000 of combined coverage. Colorado, Delaware, Idaho, Illinois, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesotta, Ohio, Oregon, Tennessee, Vermont, Virginia and West Virginia provide $250,000 of coverage. Arkansas, Florida, North Carolina, South Carolina and Wisconsin insure annuities for $300,000 per contract owner. Connecticut, New York and Washington insure annuities for $500,000 per contract owner. These same four states also provide maximum insurance coverage of $500,000 for all types of policies, whereas all the other states limit your maximum insurance coverage to $300,000.
State guaranty associations attempt to address issues before insurance firms actually become insolvent, and this may involve the guaranty association splitting a company up or selling some of its assets. If the association cannot help an insurer to rectify its financial problems then the association takes control of the firm and begins the process of liquidation. Significantly, insurance pay outs are based on the current value of your annuity rather than the future value, or the amount that your annuity should have grown to at the end of the term if the insurer had remained solvent.