State Guaranty Associations ("SGAs")

Written by Hersh Stern Updated Tuesday, December 27, 2016

financial security

Annuities are purchased as a way to avoid market risk. In a sense, they do that. But sometimes the unlikely happens and an insurance company goes under with its annuity contracts at risk. What happens then?

What happens when an insurance company fails?

When an insurance company is having a liquidity problem, the state puts it into rehabilitation and tries to save it from becoming insolvent. If the insurance company fails from there, the state government will take it over and liquidate the assets to satisfy its obligations to policyholders.

If more money is needed after that, the state guaranty system kicks in.

What is the state guaranty system?

Unlike a bank savings account or CD (which are insured by the FDIC) annuities are not protected by any national insurance program. They depend on a state-by-state safety net with coverage differing by state. In this article I review how that system works.

Each state (plus the District of Columbia) has its own guaranty fund or guaranty association. The purpose of these funds is to protect consumers in the event an insurance company in their own state completely fails.

Testimonial Image
Just bought my first SMA and was very happy to have gone through Immediate Annuities.com. I found them in an article in the Wall Street Journal. As a first time buyer, I had a lot of questions. But to their credit, they did a great job answering my questions directly or getting the right answers from the right people when they needed to.
Allen Boaman
Read 200+ verified reviews

There also is a National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) which coordinates the activities of the 50 individual state funds.

NOLHGA's website affirms that "policyholders should take comfort in knowing that state guaranty associations are there to provide protection and continuing coverage."

How does the state guaranty system work?

When the effort to keep a declining company from going bankrupt fails, the state associations will attempt to amass a pool of money to pay the policyholders. How do they do this? The other insurance companies in the state are required to chip in and bail out the failed company by covering its obligations in proportion to their own sales in that state.

Why is there so little written about the state guaranty funds?

Curiously, few consumers ever learn about the guaranty coverage available in their state.

That's because the National Association of Insurance Commissioners (NAIC), which is the chief regulatory body overseeing all insurance activity in the nation, has specifically prohibited insurance companies and agents from advertising the existence of the state guaranty fund network.

In Section 19 of its Model Act 520, passed in July, 2009, the NAIC ruled that:

“No person, including an insurer, agent or affiliate of an insurer shall make, publish, disseminate, circulate or place before the public, or cause directly or indirectly, to be made, published, disseminated, circulated or placed before the public, in any newspaper, magazine or other publication, or in the form of a notice, circular, pamphlet, letter or poster, or over any radio station or television station, or in any other way, any advertisement, announcement or statement, written or oral, which uses the existence of the Insurance Guaranty Association of this State for the purpose of sales, solicitation or inducement to purchase any form of insurance covered by the State Life and Health Insurance Guaranty Association Act.”

In recent years the state of Florida, and several others, have begun to relax the rule on disclosure of the guaranty funds. But in most states it's still prohibited to advertise or mention them.

Can I rely on my state's guaranty fund to protect my annuity investment?

Knowing that your state has a guaranty fund should never be a substitute for purchasing your annuity (or any insurance product) from a company that is well-managed and financially stable. The reason is that if your insurance company was ever declared bankrupt, even though your state fund may become active in providing some protection, you may not get full coverage. Plus, payments to policyholders are never automatic. They depend on court approval and approval by your state legislature. There could be delays of many years before the bankruptcy is adjudicated, during which time your money is not available to you. So it's best never to rely on the guaranty funds when choosing the company from which to buy your annuity.

Where can I read more about my state's coverage?

If you want to learn more about the coverage offered in your state, click your state's link below (which opens into a new tab or window) or call the phone number listed for your state's fund.

State Guaranty Associations
State Web Site Phone Number
Alabama allifega.org (205) 879-2202
Alaska aklifega.org (907) 243-2311
Arizona id.state.az.us (602) 364-3863
Arkansas arlifega.org (501) 375-9151
California califega.org (323) 782-0182
Colorado colorado.lhiga (303) 292-5022
Connecticut ctlifega.org (860) 647-1054
Delaware delifega.org (302) 456-3656
Dist. of Col. dclifega.org (202) 434-8771
Florida flahiga.org (904) 398-3644
Georgia gaiga.org (770) 621-9835
Hawaii hilifega.org (808) 528-5400
Idaho idlifega.org (208) 378-9510
Illinois ilhiga.org (773) 714-8050
Indiana inlifega.org (317) 692-0574
Iowa ialifega.org (515) 248-5712
Kansas kslifega.org (785) 271-1199
Kentucky klhiga.org (502) 895-5915
Louisiana lalifega.org (225) 381-0656
Maine melifega.org (207) 633-1090
Maryland mdlifega.org (410) 998-3907
Massachusetts malifega.org (413) 744-8483
Michigan milifega.org (517) 339-1755
Minnesota mnlifega.org (651) 407-3149
Mississippi mslifega.org (601) 981-0755
Missouri mo-iga.org (573) 634-8455
Montana mtlifega.org (262) 965-5761
Nebraska nelifega.org (402) 474-6900
Nevada nvlifega.org (702) 368-0607
New Hampshire nhlifega.org (603) 472-3734
New Jersey njlifega.org (732) 345-5200
New Mexico nmlifega.org (505) 820-7355
New York nylifega.org (212)202-4243
No. Carolina nclifega.org (877) 833-6831
North Dakota ndlifega.org (701) 235-4108
Ohio olhiga.org (614) 442-6601
Oklahoma oklifega.org (405) 272-9221
Oregon orlifega.org (855) 378-9510
Pennsylvania palifega.org (610) 975-0572
Rhode Island rilifega.org (401) 273-2921
So. Carolina sclifega.org (803) 276-0271
South Dakota sdlifega.org (605) 336-0177
Tennessee tnlifega.org (615) 242-8758
Texas txlifega.org (512) 476-5101
Utah utlifega.org (801) 320-9955
Vermont vtlifega.org (802) 249-0284
Virginia valifega.org (804) 282-2240
Washington walifega.org (360) 426-6744
West Virginia wvlifega.org (304) 733-6904
Wisconsin wilifega.org (608) 242-9473
Wyoming wyiga.org (303) 292-5022

News stories about insurance companies that once failed:

New York Times - Nov. 14, 2008 - What Happens When Your Insurer Goes Under? The Complete Story of Executive Life Insurance Company's Bankruptcy in 1991

We'd love to hear from you!

Please post your comment or question. It's completely safe – we never publish your email address.

Add a new comment:(Allowed tags: <b><i><br>)


Comments (16)

  1. Phil Lambert:
    Nov 07, 2014 at 12:17 PM

    You sent me quotes based on 300k, but my state guaranty association only covers up to 250k. Would it make sense to split the 300k in half and buy annuities with two different companies?

    -Phil

  2. Hersh Stern:
    Nov 07, 2014 at 12:39 PM

    Hi Phil,

    I generally encourage people to split their premium in order to "spread the risk". However, when it comes to the state guaranty associations, my advice would be to contact them directly, and here's why.

    Guaranty funds usually either cover per person or per insurance company. If your state's fund only covers per person, then they will only pay you $250k in your lifetime, regardless of how many annuities you have or who you have them with. If this is the case, splitting your premium will not help you.

    You can find your state fund's phone number in the table above. Let me know if you have any further questions by calling me at 800-872-6684 or posting any comments or questions here.

    -Hersh

  3. Harry:
    Nov 11, 2014 at 04:09 PM

    I am a couple of years from being ready to buy, but I am starting to think about this and I have two questions. 1. I live in MD where the state "insures" annuities up to $250,000. As a general principal, if I want $750,000 in annuities, should I consider 3 annuities from 3 companies of $250k each or is this being too careful. Is one $750k annuity from a highly rated company reasonable enough? 2. Following from that, I have reviewed your ratings of insurance companies. Is there some kind of line in the ratings above which one should feel confident and below which it gets more dicey? i.e. Is there much safety difference in an A+ company and a B+++ company?

  4. Hersh Stern:
    Nov 11, 2014 at 04:10 PM

    Dear Harry,

    First, I need to add this caveat... The State Guaranty Associations (SGAs) prohibit insurance agents from mentioning their coverage in order to promote the sale of annuities or insurance. So please keep that in mind as you read my response.

    All things being equal, I encourage you to split your purchases among several companies in order to keep the premium at risk within the coverage limits. That’s true even when you’re buying from a triple-AAA rated company. The reason is that in the past it has occurred that Triple-AAA companies have folded. You may remember that AIG, which was rated AAA as recently as six months before the Treasury bailed them out in 2008, nearly went into bankruptcy. So while it’s recommended to buy from the most financially stable companies, that in itself may not be a perfect guarantee of future safety. Additionally, you need to research whether the $250k coverage you mentioned Maryland “insures” for is once per person forever or if it's $250k per company, meaning if 3 or 5 of your companies go belly up, then the coverage is $250k for each company. If you call your state’s SGA phone number you should get an answer to this question. If it's just a one time coverage for one company and that coverage is an amount significantly less than the total amount you have in mind to invest, what will you do? Do you put all your money with the strongest company you can find today? Or, do you hedge your bet and split the money among the strongest five companies you can find? That's how I would answer your question about "is there much difference between a A+ and a B++ company".

    Good luck with this and don't hesitate to call me if you have further questions.

    Hersh

  5. Daniel:
    Jan 28, 2015 at 09:34 AM

    An immediate annuity in Pa. is guaranteed up to $300,000 if the issuing company goes insolvent. What if I have two $300,000 annuities with two different companies and both become insolvent, will each be guaranteed for $300,000?

  6. Hersh Stern:
    Jan 28, 2015 at 10:34 AM

    Your state coverage is not per policy but per owner. So whether you have one or multiple immediate annuity policies with one or several insurance companies, the total protection in PA is $300,000 per owner.

    I hope I've answered your question to your satisfaction.

    -Hersh

  7. Ron:
    Feb 06, 2015 at 02:24 PM

    I’ve been told to split my premium between a few companies to reduce the risk if one company goes belly up. Is this your advice too or would I get a higher return just picking a highly-rated company for the entire lump sum?

  8. Hersh Stern:
    Feb 06, 2015 at 02:49 PM

    Hi Ron,

    Let’s first look at what happens to the quoted income amounts when you split a larger premium into several smaller contracts.

    Say you had $500,000 to invest and you received a list of quotes and the XYZ Life Insurance Company was offering you the most competitive rate which was $5,000 in lifetime monthly income. If you divided that $500,000 into five equal contracts of $100,000 each, the XYZ company may only pay you $990 a month in each of your five contracts. When you multiply the $990 times 5, your resulting income would only be $4,950 instead of $5,000. So there is a slight reduction.

    It’s true that most insurance companies pay you a slightly higher monthly income when you buy one large annuity versus several smaller annuities totaling the same premium with the same company.

    Now let’s expand this example. Say you only bought one $100,000 policy from XYZ and spent the remaining $400,000 among four less competitive companies. Your overall monthly income from spending $500,000 across five companies would be several percentage points less than if you put all of your premium with XYZ.

    So if your only goal was to maximize income, and if XYZ was a highly-rated insurance company, you may be persuaded to put all your money with XYZ.

    On the other hand, if you wanted to create the maximum safety for your annuity income stream (over the next 10, 15, 20 years) and that was a more important goal to you than just getting the highest income possible, you would be better served then to diversify your premium across several companies.

    The best way to approach this would be to request a spreadsheet of quotes at the $500,000 and the $100,000 levels to see the actual tradeoff in income generated by both dollar amounts. We could send you such a list of quotes from many companies. We could also assist you in applying with several, if you'd like.

    Of course, any conversation about diversifying your premium is usually related to obtaining the maximum coverage you can from your state guaranty association. Most consumers split their premium for this very reason: to spread the risk and stay under the coverage limit of their state’s guaranty fund.

    I would advise you to call your state fund and ask them whether the coverage limits are applied per person or per insurance company. If the limit is applied per person, then the fund will only pay you a total of the maximum coverage amount stated in its rules, during your lifetime. The fund will not pay you that maximum amount every time one of your annuity companies goes bankrupt. If this is the case in your state, then splitting the premium among several companies may not accomplish what you have in mind, if you are spending more premium up front than the state’s maximum coverage.

    You may still want to diversify but not in order to “game” the guaranty association limit, but rather to really reduce your risk by not putting all your eggs in one basket! The reduction in overall monthly income we discussed earlier would be a small price to pay for the added "peace of mind."

    -Hersh

  9. Will:
    Apr 24, 2015 at 12:36 PM

    Is there any advantage to purchasing two at $100,000 each versus one at $200,000 from the same company? Looking at the quotes that you sent, I am inclined to purchase two annuities at $100,000 each to start a laddering strategy.

  10. Hersh Stern:
    Apr 24, 2015 at 01:20 PM

    Hi Will-

    Depending on your state association’s rule there may be an advantage to splitting the full premium between different insurance companies, for added diversification, safety, and state coverage.

    Some of my clients also split up their purchase for some of the following reasons:

    1. They want to ladder their purchases over time to hopefully get a better interest rate in the future. You can read an article regarding laddering here:

    https://www.immediateannuities.com/annuity-shopper/an-annuity-ladder-may-help-you-ease-into-an-annuity-purchase.html

    2. They name a different spouse as the owner of each annuity.

    3. They set up each annuity with a different payout option (i.e., 15 year period certain vs. life only).

    There may be other reasons too that don’t come to mind, right now.

    Generally, the reduction in monthly income from buying two smaller policies versus one large policy is inconsequential.

    -Hersh

  11. Bill:
    Jul 27, 2015 at 10:46 AM

    In my state all annuities are guaranteed only "per owner" up to $300,000 regardless of how many different contracts I have. Can I have my wife fill out one as the owner so that we can get an additional $ 300,000 insurance? I am buying the annuity with my IRA.

  12. Hersh Stern:
    Jul 27, 2015 at 10:48 AM

    Hi Bill-

    Yes, if the coverage is per person and your wife is the registered owner of her own annuity then she will have the same $300k coverage for the annuity she owns, as you do for the annuity you own. The $300k limitation is not per family but per person.

    But it’s important to know that if the funding source for these annuities are IRA or 401k monies, then her annuity needs to be paid for by her own IRA/401k (not yours). You can’t transfer $300k of your IRA to an annuity for which she is the official owner.

    Off topic – you’re permitted to use your IRA/401k money to buy a “joint life” annuity which covers both of you, as long as you are the owner and primary annuitant and she is only the surviving spouse (not an owner). Similarly, she can buy a joint life annuity with herself as owner and primary annuitant and add you as surviving spouse. Each of the above annuities would have a max of $300k coverage.

    Hersh

  13. Mike:
    Jan 07, 2016 at 02:07 PM

    Is the money that I put into an immediate annuity held in a separate account by the insurance company that is guaranteed to be there if the company folds?

  14. Hersh Stern:
    Jan 07, 2016 at 02:07 PM

    Hi Mike-

    No, fixed immediate annuities (the type you see at our web site) are not segregated from the a company’s other assets. Only premium in a variable immediate annuity would be in a separate account.

    Hersh

  15. James:
    Jan 08, 2016 at 02:26 PM

    What happens if the company holding my money and paying my monthly checks merges or sells its assets to another company or if they go bankrupt before all my money is paid back to me?

  16. Hersh Stern:
    Jan 08, 2016 at 02:40 PM

    Hi James,

    When insurance companies merge or buy out smaller companies, the new entity continues to pay the obligations of the previous companies. In 2015, for example, several insurance companies merged or were acquired.

    See this Wall St. Journal article about what happened:

    http://blogs.wsj.com/moneybeat/2015/09/23/health-insurance-mergers-aetna-and-anthem-win-over-politicians/

    Insurance companies are highly regulated and the regulators ensure that payments continue per the contract between you and the continuing or subsequent entity.

    Hersh