What does 'legal reserve' mean in insurance?

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Legal reserve refers to the minimum reserves a life insurer must establish in its insurance contracts, as determined by existing laws in U.S. states. In other words, legal reserve life insurance companies need to comply with the reserve fund requirements established by state insurance laws to legitimize its business and to operate.

What’s advantageous about a required legal reserve policy is that it ensures the payment of benefits to policyholders. Here, a sizable amount of the calculated premium goes into the reserve fund of the owner of the policy. This actually counts as a liability to the life insurer, but it is put in place by the governing State Insurance Department to guarantee that consumers are fully protected.

The State Insurance Department also oversees the review and approval of all life insurer policy forms and even sales materials before they can be made available to the public. It also keeps watch of possible illegal mergers and handles consumer complaints.

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 With more than a trillion U.S. dollars of death protection being provided today by the life insurance industry, the legal reserve fund is key in both determining and measuring a life insurer’s assets and maintaining its commitments to the policies it has issued. In short, these are key financial safeguards that guarantee living and death benefits for everyone insured.

State Mutual Insurance was started by a group of friends who wanted to give service to the community back in the 1930s. For over 70 years, the company has been providing quality Medicare Supplement insurance, following its commitment to giving Americans complete health security. More on the company here.