4.3 Virginia Life, Accident and Sickness Insurance Guaranty Association
Key Takeaways
- The Virginia Life, Accident and Sickness Insurance Guaranty Association (VALIFEGA) protects Virginia residents when a member life/health insurer becomes insolvent, under Title 38.2, Chapter 17.
- Core limits: $300,000 life death benefit, $100,000 life net cash surrender value, $250,000 annuity present value, $300,000 disability/long-term care, $500,000 major medical health benefit plans.
- Non-disability accident & sickness (basic hospital/medical/surgical) is capped at $100,000, lower than the disability and major-medical limits.
- An overall aggregate cap of $350,000 applies per insured life across most lines (health benefit plans get a separate $500,000 cap; multi-policy owners cap at $5,000,000).
- Producers are prohibited from using or advertising guaranty association protection as an inducement to buy insurance.
Purpose of the Guaranty Association
The Virginia Life, Accident and Sickness Insurance Guaranty Association (VALIFEGA) is a statutory nonprofit created under Title 38.2, Chapter 17 (sections 38.2-1700 and following). Its job is to protect Virginia resident policyholders, insureds, beneficiaries, and annuitants when a member life or health insurance company becomes insolvent — legally unable to pay its obligations. Every insurer licensed to write life, annuity, or accident-and-sickness business in Virginia must be a member as a condition of doing business.
How an insolvency is handled
- Liquidation order — a court, on the SCC's petition, places the failed insurer into receivership/liquidation.
- Association activates — VALIFEGA assumes the covered in-force policies of Virginia residents.
- Coverage continues — the Association keeps policies in force or arranges assumption by a solvent insurer, up to statutory limits.
- Claims paid — death claims, surrenders within limits, and health claims are honored.
- Assessment — the Association recoups costs by assessing surviving member insurers in proportion to their Virginia premium.
Funding
VALIFEGA is not funded by taxpayers or state appropriations. It is funded by post-insolvency assessments on member insurers, capped at a percentage of each insurer's average annual premium for the relevant account. Insurers may, in turn, recoup assessments through a premium tax offset or rate surcharge over time. This is why the protection cannot be marketed: the consumer is not paying for a guarantee, and advertising it could distort competition toward weaker insurers.
Coverage Limits You Must Memorize
The exam loves the exact Virginia dollar limits. They differ by line of business, and the aggregate cap is the most commonly missed detail.
Life insurance
| Benefit | Maximum coverage |
|---|---|
| Death benefit | $300,000 per insured life |
| Net cash surrender / withdrawal value | $100,000 per insured life |
Annuities
| Benefit | Maximum coverage |
|---|---|
| Present value of annuity benefits | $250,000 per contract owner |
| Structured settlement annuity | $250,000 per payee |
Accident and sickness (health)
| Health line | Maximum coverage |
|---|---|
| Non-disability A&S (basic hospital, medical, surgical) | $100,000 |
| Disability income insurance | $300,000 |
| Long-term care insurance | $300,000 |
| Major-medical "health benefit plans" | $500,000 |
Aggregate cap (the trap)
Regardless of how many policies or lines a single person holds, VALIFEGA's liability is capped at $350,000 in the aggregate per insured life across life, annuity, disability, and long-term care combined — except that health benefit plans (major medical) carry their own higher $500,000 cap. For an owner of multiple non-group life policies, total benefits are capped at $5,000,000 regardless of the number of policies.
Exam tip: A person with a $300,000 death benefit AND a $250,000 annuity from the same failed insurer does NOT collect $550,000 — the $350,000 aggregate-per-life cap applies. This blended scenario is a favorite distractor.
What Is and Is Not Covered
Covered
- Individual and group life insurance for Virginia residents
- Annuity contracts (fixed; the guaranteed portion)
- Accident and sickness insurance: major medical, disability income, long-term care, Medicare Supplement
- Certain structured settlement annuity payees
NOT covered
| Excluded | Reason |
|---|---|
| Policies from a non-member / unlicensed insurer | Not part of the funding pool |
| Self-funded employer (ERISA) health plans | Not "insurance" under the Act |
| Federal/government programs (Medicare, Medicaid) | Outside Association scope |
| The non-guaranteed investment portion of variable life/annuity | Risk borne by separate account, not the insurer's general account |
| Amounts above the statutory limits | Capped by 38.2-1700 et seq. |
| Coverage where the person is not a Virginia resident (with limited reciprocity rules) | Residency requirement |
The variable-product point is heavily tested: only the guaranteed general-account portion of a variable annuity is protected; the separate-account investment value is not, because that risk was always the policyowner's.
Producer Restrictions — The Advertising Ban
Under 38.2-1714, a producer or insurer may not use the existence of the Guaranty Association in any advertisement, sales presentation, or solicitation. This is an absolute, frequently tested rule.
Prohibited
- Telling a prospect their policy is "protected by the state guaranty fund"
- Comparing VALIFEGA to FDIC or SIPC insurance
- Implying a policy is "guaranteed" because the Association exists
- Printing Association references on marketing materials
Required
- A statutory disclaimer notice (describing the Association's existence, limits, and exclusions) must be delivered with the policy or as the Act requires — but it is a disclosure, never a sales tool.
- If a consumer asks, the producer may give accurate information but must not overstate the limits.
Exam tip: The single most tested sentence here is: a producer cannot use guaranty association coverage as a selling point. If an answer choice praises the fund to close a sale, it is the violation.
Claim Process After Insolvency
| Step | What happens |
|---|---|
| 1. Notice | The court-appointed liquidator notifies affected policyholders |
| 2. Assessment | VALIFEGA reviews which policies are covered and to what limit |
| 3. Continuation | Coverage is kept in force or transferred to a solvent assuming insurer |
| 4. Payment | Claims and surrenders are paid within the statutory limits |
Policyholders should keep paying premiums during the process; lapsing coverage forfeits protection. The Association may impose temporary moratoriums on cash surrenders to prevent a run while it stabilizes the block of business.
A Virginia resident's life insurer becomes insolvent. She held a $300,000 death benefit policy and a fixed annuity with a $250,000 present value from that same company. What is the most VALIFEGA will pay her household across these contracts?
Which statement about a producer and the Virginia Guaranty Association is correct?
What is the maximum amount VALIFEGA covers for the net cash surrender value of a life insurance policy?