Financial Management Network

Stable Value Fund

How State Guarantee Insurances For Fixed Annuities Work

At FMN, we've had a number of questions regarding the financial state of Lincoln and how the Stable Value Fund is covered under the state guarantee insurances. Below is a summary explanation of how the state guarantee insurances for fixed annuities work. For state specific information, or to do further research on your own, see the third party website www.nolhga.com.

Money invested in variable insurance products is held in a separate account which is segregated from the insurance company’s general account. Therefore those assets may not be tapped for liabilities for any other area of the company under any circumstances. Guaranty funds may not cover the assets in separate accounts.

Assets underlying fixed products are held in the general account that is governed by the state insurance law which is designed to preserve and enhance the solvency of the general account to assure that contractual obligations to the client are fulfilled.

State insurance departments regulate insurers. Various tests and minimum thresholds are in place by state insurance departments to assist them in monitoring corporate solvency and alert them to step in and assist a company in regaining financial stability if needed. If the state department of insurance determines the company no longer meets the solvency requirements and has the company declared insolvent, policies will continue to be honored as long as premiums are paid or cash value exists.

Coverage is generally provided by the guaranty association in the policyholder’s state of residence, even if the policy was purchased in another state. Coverage varies by state and type of policy. Not all types of policies are covered by the guaranty funds, especially that portion of variable products where the investment risk and gain is borne by the policyholder, not the company.

If the state insurance department determines the company no longer meets the solvency requirements and has the company declared insolvent, policies will continue to be honored as long as premiums are paid or cash value exists. The claims on the covered policies will be paid, up to the lesser of policy or statutory limits, by state guaranty associations. The guaranty funds pay policy benefits/claims up to the lesser of the policy or statutory limits. State life and health insurance guaranty associations provide a safety net for their state's policyholders if an insurer is declared insolvent. Coverage is generally provided by the guaranty association in the policyholder’s state of residence at the time of liquidation, even if the policy was purchased in another state. Coverage varies by state and type of policy. Not all types of policies are covered by the guaranty funds, especially that portion of variable products where the investment risk and gain is borne by the policyholder, not the company. More information is available through the various state departments of insurance or the state's guaranty association.

Insurance company insolvencies are governed by state insurance liquidation and rehabilitation laws. Those laws set out the priorities of the various parties in an insolvency of the insurance company.

If there are not sufficient assets in the insurance company, the guaranty funds pay policy benefits/claims for covered policies up to the lesser of the policy or statutory limits. The guaranty funds make those payments as promptly as possible and without regard to any amounts which may be available from the liquidation estate. Any policy benefit/claim over the statutory cap or which are not otherwise covered by the guaranty fund becomes a claim against the liquidation estate and will be considered for payment by the liquidator once the higher priority expenses (such as liquidator expenses in handling the liquidation) are known and there is a court approved plan which pays each member of that same class the same percentage amount of the liquidation estate assets. Claims of policyholders against the estate are a higher priority (paid before) claims of general creditors or shareholders.