We often get calls from trustees who are concerned about the stability of a life insurance carrier in their portfolio. Lately, the concern has been Phoenix Life and Annuity Company (current Comdex of 39), but there have been others.
Insurance carriers are regulated on a state by state basis, by state insurance departments. Each state licenses all producers, provides regulation oversight, and monitors the health of the carriers domiciled in that state. In each state, an insurance commissioner heads the state insurance department. The commissioner has the responsibility to determine when an insurance company domiciled in the state should be overseen.
When a carrier is found to be unable to meet its obligations, the state steps in and attempts to help the company through a process of rehabilitation. During this period of rehabilitation every attempt is made by the state to restore the company.
If a company cannot be rehabilitated, the company is declared insolvent, and the state will take steps to liquidate the company, by taking control of the company. If liquidation occurs, you will be notified as policy owner. The goal of this liquidation is typically the transfer of the insurance policies to a fiscally sound company. During this time there may be limits on surrender requests, or other limits placed on policyholders. It should be emphasized that the typical outcome in the past has been to transfer policies to a new company without a loss of death benefit to the policy owner. For example, a listing of some well known cases is below:
- 2011 – Golden State Mutual Life Company, a California company that was put into conservatorship in September of 2009. IA American Life Insurance Company, an A- rated company, assumed all of the inforce policies and annuity contracts.
- 2009 – Shenandoah Life Insurance Company, a Virginia company. Rehabilitation of Shenandoah Life has been finalized and the company is now a subsidiary of Prosperity Life Insurance Group, LLC.
- 1994 – Confederation Life, a company that had one third of its business in the US and was dealt with in a number of states. Its business was sold off to a number of companies. For example, group health policies were sold to Hartford Life and Accident Insurance Company. Life and some annuity business was sold to Phoenix Life Insurance Company. Other annuity business was sold to Lincoln National Insurance Company.
- 1991 – Executive Life Insurance Company, a large California based life insurance and annuity company. In one of the more prominent liquidations, all of the carrier’s policies were assumed by Aurora National Life Insurance Company in 1993.
During this process, the state insurance commissioner and department work closely with the state guaranty associations which are organized under state law to provide certain protections to state residents who own or are beneficiaries of policies issued by a life or health insurance company that has been ordered liquidated. Guaranty associations work to coordinate a comprehensive plan to provide protection for the failed insurer’s policyholders, and this protection can be provided in several ways. As mentioned, the association will work to identify a financially sound insurer to take over the troubled company’s policies. If that is not possible, a guaranty association may continue the insurer’s policies or issue replacement policies. The amount of protection provided and when it will be received will depend on the guaranty association law in the state that covers policy owners and the facts and circumstances of that particular case.
Policy owners do not have to do anything to be protected under these associations; however there are limits to the coverage that will be provided. Though coverage can differ from state to state, states provide at least $100,000 in life insurance death benefits, cash surrender or withdrawal values.
What should a trustee do if they are worried about a carrier?
First of all, every trustee of a life insurance policy should monitor the health of all of the carriers in its portfolio. A baseline for carrier financial stability should be developed and if a carrier drops below minimum requirements it should be noted.
If you have a carrier in your portfolio that has dropped below your minimum criteria, this is not a reason alone to take drastic steps; however, if you believe that the carrier is no longer stable you must review your options. Those options would include:
- Purchasing a new policy with a different, more stable carrier.
- Viable option if new policy provides better or at least approaches the same benefits as existing policy. Subject to full underwriting of insured(s).
- Surrendering the policy for cash value.
- Should only be done in rare occasions when the existing carrier is extremely high risk and the cash value is significant relative to the death benefit.
- Selling the policy in the secondary market.
- Rarely a viable option, but can possibly provide an amount greater than cash value.
Managing life insurance was never an easy job. In the volatile financial environment we live in these days, tracking carrier stability just adds another layer of management.