With AIG, one of the largest US insurers, apparantly teetering on the brink of collapse, I was wondering what would happen to all of the policy holders who are covered by the company.  If you hold an AIG policy, should you be worried?  Here's what I found out, and while there is some protection, policyholders could stand to lose a substantial amount of their policy if AIG or any other insurance company runs into problems.

Life and Health Insurance

According to the National Organization of Life and Health Insurance Guaranty Associations, every state has a life and health guaranty association that works to protect policyholders.  Should an insurance company face severe distress, it will be taken over by the state insurance organization.  Claims will continue to be honored as long as premiums are paid.  The state Guaranty association will either pay any claims directly, or work to have another healthier insurance company take over the policies.

The money to pay the claims comes from other insurance companies that operate in the same line of business as the claims that are being paid.  Coverage is provided by your state of residence  even if you bought the policy in another state.

Generally, direct individual or direct group life and health insurance policies as well as individual annuity contracts issued by the guaranty association’s member insurers are covered by the association. Guaranty association coverage does not extend to any non-guaranteed policy or annuity, or portion thereof, or any portion of a policy in which investment risk is borne by the individual, such as a variable annuity.  Most states do not provide coverage for HMOs.  Check with your state insurance commission for the specific details of what is covered.

Policy Coverage

Policies are not fully protected.  Although it varies by state, the general coverage is as follows:

• $300,000 in life insurance death benefits (per insured life)
• $100,000 in cash surrender or withdrawal values for life insurance (per insured life)
• $100,000 in withdrawal and cash values for annuities (per insured life)
• $100,000 in health insurance policy benefits (per insured life)

If you stand to claim more than this coverage, you might still be able to get the money.  Policyholders can submit a general creditor claim and receive compensation as part of the liquidation of assets of the company.

But that's not guaranteed.  If you have a large life insurance policy, you might have to kiss a substantial portion of it goodbye.  And if your health condition has changed since you took out the original policy, it's not entirely clear if you'll still be able to get coverage, or coverage at a comparable price.

Property and Casualty

Property  and Casualty claims are covered differently and vary by state.  For more information see the National Conference of Insurance Guaranty Funds.