What Insurance 'Bailout' Means for Your Policy

IMAGE: what TARP Funds for Insurance Companies

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.

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