What Happens If Your Life Insurance Company Fails?

The events of 2008 and early 2009 and the failure of some major insurance companies such as AIG, have created a lot of anxiety for policyholders and have naturally led to many questions with regards to the protection they have in case their insurance company fails.

The fact of the matter is that there have only been three insurance insolvencies over the last generation in Canada. Other than the recent failure of AIG, the two others were the Confederation Life and Sovereign Life failures that happened in the mid-1990s.

In Canada, Assuris, that is a non-profit organization set up by the insurance industry to protect the guarantees of Canadian policyholders, will step in, in the event of failure of a life insurance company to protect the policyholders. The protection that Assuris provides is fairly extensive but is not as widely known as the protection offered by Canadian Deposit Insurance Corporation (CDIC) that protects deposits held at Canadian banks.

Currently, 99 life insurance companies are required by law to contribute to Assuris, who in turn protects guarantees on all insurance products, including segregated funds and life annuities offered by insurance companies, in case of insolvency.

Assuris’ mandate is to ensure that a solvent insurer can acquire the policies of a failed competitor and continue the coverage and in the case of Confederation Life, policyholders got 100% of their policies guaranteed. However, in a worst-case-scenario, policyholders will have 85% of the guarantees in their insurance policies covered by Assuris, if their guarantees exceed the proscribed minimum amounts. This is especially important as a life insurance policy may have been issued many years ago when the policyholder was younger and in good health and the same person may not even qualify for life insurance today due to health problems.

Assuris offers a number of different protections based on the type of policy. These range from health expenses, monthly income guarantees for disability insurance policies and life annuities and guarantees on death benefits, cash values and accumulated values of life insurance policies.

An important feature of Assuris protection is that it is applied to all benefits of a similar type. If you have more than one policy with the failed company, you will need to add together all similar benefits before applying the Assuris protection.

With regards to life insurance policies, in case of insolvency of the insurer, a policy holder would have their death benefit guaranteed to $200,000 or 85% of the death benefit value, whichever is higher. As for the cash value of the policy, it would be guaranteed up to $60,000 or 85%, whichever is higher.

Deposit type products will also be transferred to a solvent company. For these products, Assuris guarantees that you will retain 100% of your Accumulated Value up to $100,000. Deposit type products include accumulation annuities, universal life overflow accounts, premium deposit accounts and dividend deposit accounts.

When it comes to segregated funds, any resets or guarantees locked in on segregated funds before the declaration of insolvency are protected by Assuris. This means that investors will have either $60,000 or 85% of their guaranteed balance protected, whichever is higher.

According to Joseé Rheault, vice-president of communications with Assuris, who presented on this topic at the Independent Financial Brokers Spring Summit in Toronto in 2009, “If the value of the segregated fund remains the same or is worth more than the guaranteed principal Assuris’ protection is not needed. If the value is lower, we apply the protection on the guaranteed amount. If you have a segregated fund that has a 75% (principal guarantee), Assuris protection will apply to 85% of that guarantee.”

When it comes to segregated funds with guaranteed minimum withdrawal benefits (GMWB) such as Manulife’s Income Plus or Sunlife’s Sunwise Elite Plus products, the rules are more complicated. These products have two distinct phases, a savings or accumulation phase (defined by no withdrawals having been made in the previous 12 months) and a payout phase (when withdrawals are being made). The protection that Assuris provides is different depending on which phase the product is in.  If a policyholder is in the savings phase, then the product would come under cash value protection. This means that the guaranteed withdrawal balance value is protected up to 60,000 or 85%, whichever is higher.

If the policyholder is in the payout phase, they are going to be protected by the monthly income benefit guarantee, which is $2,000 a month or 85%. The total guarantee is based on the GMWB balance at the time of insolvency.

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