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What Happens to My Policy When an Insurance Company Goes Bankrupt?

2012 November 6

Thankfully, we have only read about this experience and have never had one of the companies we represent go into bankruptcy (or insolvency, which is the term used in the insurance industry). If an insurance company goes bankrupt or is otherwise unable to pay its claims, there is a safety net in each state – known as a guaranty fund – which works similar to the way the FDIC protects deposits in banks. Each state charges insurance companies a tax on their premiums that goes to an insolvency fund that would pay claims up to a certain limit if the company is financially incapable of doing so on their own. The company is then taken over by the Insurance Department of the state in which they are domiciled and goes through a period of rehabilitation. This generally involves the Insurance Department reorganizing the company, and in most cases, finding a new company to buy the assets of the failing company. If the assets being bought do not generate enough to cover the liabilities of the company, the guaranty fund makes up the difference and, in most cases, the insured person is made whole and their policy or claim protection continues. In the event that no buyer is found, the company’s assets are liquidated, and the guaranty fund provides protection up to the state limit for those with a pending claim or outstanding premium. This is a very rare event and the advantage of term insurance is that you do not have a lot of money “invested” in a failing company (like you would with a cash value type plan), and you could simply apply elsewhere. In short – it is definitely an experience to avoid, but having a term life policy greatly minimizes some of the complications.