What Insurance 'Bailout' Means for Your Policy

IMAGE: what TARP Funds for Insurance CompaniesABC News Photo Illustration
What TARP funds for insurance companies means to consumers.

Richard Fine woke up Thursday morning, sat down to write a check to his insurance company, Genworth Financial, and while listening to the news realized the very company to which he was about to send his money was asking the federal government for a bailout.

"I didn't expect to see my insurance company seeking a bailout. I didn't think insurance companies could fall prey to the same problems as the banks, but I guess we all should have known better after AIG," said Fine, 62, a business owner from Ridgewood, N.J.

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The Treasury Department announced this week that Genworth, along with some of the country's largest insurers -- Hartford Financial Services Group, Lincoln National Corp, Prudential and Aegon -- would receive assistance through the Troubled Asset Relief Program, the same emergency fund established last year to bail out ailing banks.

Life insurance companies are increasingly in trouble. Their ratings and stock prices have fallen precipitously in recent weeks.

The federal government, the insurance companies, and the state guaranty associations, which serve as safety nets in case an insurance company fails, insist no one should be worried. But for millions of Americans who depend on insurance to take care of their families in case they die, or rely on money they receive from annuities, news of the bailout has them concerned.

"Yes, I'm concerned. Life insurance and long-term care insurance protect you against something going wrong in the future. Long-term care can drain a family's savings. I have a wife and two kids in college and I would just as soon not drain what's left of our equity if I ended up in a hospital," Fine said.

Intervention, the government and the insurers say, is not a bailout for failing companies -- comparable to the assistance banks received last year -- but the newest tool in an arsenal intended to keep the insurers solvent and policy holders protected.

What to Do If Company Fails

While TARP funds could help put companies on a firmer footing, policy holders are already insulated against companies that fail, because every state has a system in place that ensures consumers receive the benefits guaranteed in their insurance policies.

"People should not be panicked," said Sean McKenna, a spokesman for the National Organization of Life and Health Insurance Guaranty Associations. "The guaranty associations are state based and provide protection to state residents if their insurance provider becomes insolvent."

The funds are supported by assessments charged to insurance companies and the claims paid by the funds are generally capped at $300,000, but each state has its own limits.

If your insurance company does fail, McKenna said, the process by which the guaranty associations pay you back kicks in automatically.

"The policy holder doesn't have to do anything. State guaranty associations fulfill the promises of their contracts up to the limits in the state statute automatically," he said.

That the guaranty associations only insure individuals up to $300,000 gives some solace to Neil Draddy, a 46-year-old real estate broker from Silver Spring, Md.

Draddy has a 20-year term life insurance program with Prudential. If he dies in that time, his wife – and their three young children -- will receive $1.5million, unless Prudential becomes insolvent.

"I'm obviously hoping I don't die. If I do and they only get $300,000, we fortunately have investments spread around in other places. I'm not overly concerned, given the size of the company," Draddy said.

Not everyone, however, trusts that these companies are as solvent as they say they are or confident that the guaranty associations are capable of covering consumers' policies if the companies collapse.

Bob Hunter, director of the Consumer Federation of America, says policy holders should be concerned.

Tips for Customers

"Of course people need to worry," said Hunter. "The guaranty system is pretty flimsy and it might take years to get back what you're owed. Nationally if guaranty associations were tapped to the maximum amount, it would only create $9 billion a year. That's inadequate for one large insolvency. If you're talking two or more, or a string of little ones it becomes even more problematic."

Hunter recommended people do their due diligence and research the financial stability of the companies from which they plan to purchase policies.

"Do research," he said to those holding policies or looking to buy them. "Try to see if the companies are applying for TARP? Have they gotten special treatment from home state commissioners to change their accounting rules? Do research into what it will cost you to get out of your policy. If you've had a policy for a long time, you can get out without a penalty, but a new policy the penalty might be too big."

Hunter also advised people to buy short term policies paid each year or two and to not put a lot of money in an annuity – an investment paid out in regular increments over a long period of time.

The government and the companies say the bailout is necessary to shore up an industry, vital to the U.S. economy, but hit hard by the ongoing financial crisis. Millions of families' financial stability is tied up in insurance policies. Federal help, they say, would keep the companies on solid ground and buoy consumer confidence.

"This is not a bailout," said Peter Gallanis, president of the National Organization of Life and Health Insurance Guaranty Associations. "These companies are getting a small infusion of federal capital. This is a program aimed at keeping insurance companies operating on the same keel rather than rescuing those in trouble."

Life insurance companies' obligations – paying out claims and annuities -- stretch out over decades, said Gallanis. Given the current sour state of the economy, the companies need a little help now, so they can pay out their obligations later.

What the Insurers Say

Life insurers – which have $5 trillion in assets -- invest the premiums they receive from consumers into markets like bonds and mortgages, making them an important pillar of the economy.

"Insurance companies play an important role in capital markets -- bonds, commercial residential mortgages and other securities," said Terri Vaughan, CEO of the National Association of Insurance Commissioners.

The Treasury Department's decision to allot funds to the companies, she said, was "consistent with the government's intent to stabilize the economy."

Hartford Financial Services Group Inc. and Lincoln National Corp., two of the nation's largest life insurers, and several others applied to become thrift holding companies last fall, a prerequisite to receiving TARP funds.

Regulators approved holding company applications earlier this year from those companies, as well as Prudential Financial Inc., Genworth Financial Inc., and Aegon NV, a Dutch company that owns U.S. insurer Transamerica.

The insurance companies receiving TARP funds emphasized that they were able to pay the money back and policy holders should not be concerned.

"We believe we have ample capital and liquidity to meet our obligations," said Prudential spokesman Bob DeFillipo.

A Hartford spokesman echoed that sentiment, telling ABC News: "We are reinforcing the message that we are able to meet our customer obligations and are well capitalized."