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Difficulty: MediumGuaranty Associations and Solvency

Apex Mutual Life, an admitted insurer, is declared financially insolvent and ordered into liquidation. At the time of the order, a policyowner holds a whole life insurance policy with a 600,000deathbenefitanda600,000 death benefit and a 140,000 accumulated cash surrender value. Under standard state guaranty association regulations, if the policyowner surrenders the policy for cash, what is the maximum amount the association will pay for this cash surrender claim?

  1. $100,000Answer
  2. B
    $140,000
  3. C
    $300,000
  4. D
    $600,000

Answer

$100,000
Under standard state life and health guaranty association regulations, coverage is subject to statutory maximums to protect against catastrophic insolvency while managing the financial burden on member insurers. The typical cap for life insurance net cash surrender and net cash withdrawal values is 100,000perinsuredlife.Becausethepolicy′scashvalue(100,000 per insured life. Because the policy's cash value ( 140,000) exceeds this cap, the policyowner will receive a maximum of $100,000.

Step-by-Step Solution

1
Identify the type of claim being made to the guaranty association.
The policyowner is making a claim for the policy's cash surrender value.
Statutory payout limits vary depending on whether the claim is for a death benefit, cash surrender value, or health insurance benefit.
2
Determine the standard statutory cap for a cash surrender value claim.
The standard limit for net cash surrender and net cash withdrawal values for life insurance is $100,000.
Guaranty associations protect consumers against insurer insolvency but only up to specific statutory maximums.
3
Compare the actual cash value to the statutory cap.
The actual cash value is 140,000,whichexceedsthe140,000, which exceeds the 100,000 limit. Therefore, the payout is capped at $100,000.
The association pays the lesser of the actual policy value or the statutory cap.

Key Concept

Guaranty Association Statutory Coverage Limits
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Topics

Guaranty Associations and Solvency

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