Rhode Island Life Insurance Practice Exam

What is the source of funding for the Life and Health Insurance Guaranty Association?

1. State taxes

2. Federal subsidies

3. Premium payments from policyholders

4. Assessments from admitted insurance companies

The correct answer is: Assessments from admitted insurance companies

The Life and Health Insurance Guaranty Association is primarily funded through assessments levied on admitted insurance companies. This means that in the event of an insurance company becoming insolvent, the guaranty association can utilize these funds to pay claims to policyholders who are affected. The assessments help to maintain a safety net for policyholders, ensuring that they are protected even if their insurance company can no longer meet its obligations. Insurance companies contribute to the guaranty fund as a part of doing business in the state, helping to stabilize the market and provide security to consumers. These assessments are typically calculated based on a percentage of the premiums written by the insurance companies. This system ensures that the association has sufficient resources to support policyholders when claims arise due to insurer insolvency, hence providing an essential service in maintaining consumer confidence in the insurance industry. Other options such as state taxes or federal subsidies do not play a role in the funding process for the Guaranty Association, as it operates independently of those sources. Premium payments from policyholders directly go to their insurance providers and are not earmarked for the guaranty fund, making assessments from admitted insurance companies the correct financing mechanism.