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How
safe is your insurance policy? Thursday, September 18, 2008 |
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The
federal takeover of insurance giant AIG has consumers wondering: How safe is
my insurance policy? If
you have an AIG policy, it's probably safe. Although the parent company needed
an $85 billion loan from the government to stay afloat, its 71
state-regulated U.S. insurance subsidiaries have always been well capitalized
and were in no danger of not being able to pay their claims, according to the
National Association of Insurance Commissioners. The
company got in trouble mainly by buying and guaranteeing mortgages and
mortgage securities in other subsidiaries. The
company plans to repay the government loan by selling assets, which means
your AIG policy could be sold to another company. AIG sells virtually every
type of insurance, including auto, home, life and health under names such as
American General, 21st Century and the Variable Annuity Life Insurance Co.
(known as Valic). What
about other companies? It's very hard to tell whether other major insurance
companies have similar exposure to mortgage debt and could be in trouble. To
date, no other major insurers have emerged in the cavalcade of troubled
financial firms caught up in the ongoing global credit crisis. But
it's good to know what happens when insurers go under. If
any regulated insurer could not pay its claims, the regulator in the
company's home state - usually the state insurance commissioner - would start
a process known as rehabilitation. If rehab fails, the company is liquidated
and claims would be paid, up to a certain limit, by a guaranty agency in each
policyholder's state. This money comes from companies still doing business in
each state. The
limits vary somewhat by state, but in California they are $500,000 for
property/casualty insurance, $200,000 for health policies, $250,000 in life
insurance death benefits, $100,000 in cash surrender value on life insurance
and $100,000 on the present value of annuity benefits. There is no limit on
workers' comp. If
a property/casualty company fails, its policies are usually canceled and the
customer can go out and get a new one from another company. The guaranty
covers claims that have already arisen but have not been paid. In
the case of life or annuity policies, state regulators usually try to
transfer in-force policies to a new company. They also transfer the failed
company's assets and enough money from the guaranty fund to make sure the new
company can pay the failed company's claims, at least up to the guaranty-agency
limits. "Normally,
there are enough assets in the failed company that the new company will take
it over with the same benefits and the same premium," says Pete
Gallanis, director of the National Organization of Life and Health Insurance
Guaranty Associations. For
AIG customers, its subsidiaries are neither in rehab nor liquidation. Some
will probably be sold to other companies, which will take over the policies.
The new companies can't change policies' terms. However, they can raise
premiums or fees or make other changes to the extent allowed in the original
contract. Customers can stay with the new companies or cancel their policies. In
the case of home, auto and term life insurance, it's fairly easy to switch
companies, although people who had a level-term policy might pay higher
premiums if they are older or in worse health than when they took it out. Replacing
a whole or universal life policy is harder. They are very complicated and
consumers might pay surrender charges when they cancel a policy and hefty
sales commissions, which are often hidden, when they buy a new one. Their
costs also might go up if they are older or sicker. It
won't be long before agents, who make commissions on every sale, start urging
AIG customers to switch policies. "You're
going to have agents who will take advantage of the situation," says
Peter Katt, a fee-only life insurance adviser. In
the past, when a company has failed, been recapitalized or sold, pricing has
gotten worse for consumers, he says. But he's not sure if that will happen
with AIG. Robert
Hunter, director of insurance with the Consumer Federation of America, says,
"I don't think AIG is a good company for consumers. Maybe if they get
sold, policyholders will be better off." Scott
Witt, a fee-only insurance adviser, says he would encourage most AIG
customers "to wait and see. If you take action now, you are incurring a
significant and certain loss in most situations." Witt
is not worried about AIG's claims-paying ability at this time. "You
don't lose anything by waiting a few months for the dust to settle," he
says. Witt
says all consumers should check the health of their insurance company. If it
is low-rated, consider switching. Companies such as A.M. Best rate insurance
companies. You can also check them out at www.naic.org (click on Consumer Information Source),
although it's tricky because insurers go by so many different names. But
"you can't conclude that just because a company is highly rated it's
OK," Witt warns. "The
usual diversification logic that investors use for their portfolios should
also be applied to insurance. If you have a monster death benefit, a
multimillion-dollar policy, it would be prudent to have that coverage across
several companies" rather than just one, he says. Net
Worth runs Tuesdays, Thursdays and Sundays. E-mail Kathleen Pender at kpender@sfchronicle.com. http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/09/18/BUQH12VR22.DTL This article appeared on
page C - 1 of the San Francisco Chronicle |
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