What Happens If Your Life Insurance Company Goes Bust

In the rare case a life insurance company fails, a safety net is ready to protect policyholders.
Barbara Marquand
By Barbara Marquand 
Edited by Amy Danise
What Happens If Your Life Insurance Company Goes Bust?

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Most life insurance companies stay financially fit, enabling them to live up to their promises and pay claims. Fortunately, all the best life insurance companies are financially strong. But in the rare case an insurance company fails, a safety net is ready to protect policyholders.

All states have laws that govern what happens when a life insurance company gets into financial trouble, and each state has a life and health “guaranty association,” which makes sure policyholders get the coverage and benefits they’re due, up to a limit.

The basics of going under

State insurance departments regulate the insurance industry and monitor companies to make sure they’re financially sound.

When a company starts to drown and can’t meet its obligations, the state’s insurance commissioner steps in and takes control of the company’s operations. The state will notify policyholders if that happens. The state life and health insurance guaranty association works with the insurance department to help decide on one of two outcomes:

  1. Monitoring the company to see if it can get back on its feet (called rehabilitation)

  2. Liquidating the company

If the company has to be liquidated, the guaranty association focuses on protecting policyholders. The association may provide coverage and pay claims directly or transfer the policies to a financially stable insurance company. It might also work with other state guaranty associations.

More than a decade ago, the process of moving policyholders to a sound company could take years; now when that strategy is used, it typically takes months, according to the National Organization of Life & Health Insurance Guaranty Associations.

During a liquidation, the company’s assets are sold off and used to pay creditors, including policyholders. The guaranty association assess its insurance company members to cover claims if there is a shortfall. All life insurance companies licensed to do business in a state must belong to that state’s guaranty association. Policyholders who live in states where the insurer was not licensed are typically covered by the association in the state where the liquidated company is based.

Guaranty association benefit caps

The amount of benefits that state guaranty associations can pay out or transfer to another company are capped. The limits vary among states, but the associations in every state offer at least the following for life insurance policies, according to the National Organization of Life & Health Insurance Guaranty Associations:

  • $300,000 in life insurance death benefits

  • $100,000 in cash surrender or withdrawals from permanent life insurance policies

  • $100,000 withdrawal from and cash values for annuities

You can get specifics about your state guaranty association on the national organization’s website.

If your policy promised benefits greater than what the guaranty association can provide, you may submit a claim against the estate of the failed insurance company for the difference.

Why you should check insurance company financial strength ratings

Although states provide a safety net in case of insurance company failures, it’s far better to avoid the hassle in the first place. When you're buying life insurance, check the company’s financial strength ratings.

It only takes a few minutes to look them up on the websites of independent rating firms, such as A.M. Best, Fitch Ratings, Moody’s Investor Services or Standard & Poor’s Ratings Services. (In some cases you may need to register for free to access ratings.) The ratings agencies issue grades for insurers, and each has its own scale. An A+ is the fifth-best rating from Fitch, for instance, and the second-best rating from A.M. Best.

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