With so many insurance companies struggling in these economically trying times you may be wondering what happens if your life insurance company goes bankrupt. In most cases, you don’t have to worry. All 50 states have emergency funds set up for these types of situations. Called a state guaranty fund these state administered funds are designed to protect life insurance policyholders in the event that their life insurance company goes bankrupt.
Licensed insurance companies have to pay an annual fee into the pool so that if a company goes out of business the life insurance policies are honored. In many cases, it doesn’t even come to this because another company will buy the bankrupt company out before the customer even knows about it (which makes sense when you think about it – because every life insurance company would be hurt to some degree if there was a lot of publicity around even just one life insurance company going under).
How are life insurance policies protected by the state?
Each state has its own department of insurance and regulations within these departments vary from state to state. However, every state has a back up account to help the insured when a company goes bankrupt. It is called the State Guaranty Association. This includes car insurance, homeowners insurance, life insurance and other types of coverage. The main variable from state to state is the maximum amount the department of insurance will pay out for individual policies.
In most cases, you will receive a form letter from your insurance agency when they go bankrupt or become financially nonviable. The letter will either tell you what company has taken over your policy or that your policy has been turned over to the state department of insurance. A phone number, e-mail address, and website is typically included in the letter for any questions you may have.
After you receive your pay out in the amount you have already put into your premiums, you will want to get a policy with a new company and apply the money from the payout to the new policy. It is important to follow the instructions on the letter you receive from your insurance company so that you don’t miss deadlines and other important elements of how to protect your policy. If you have a claim pending, you will have a different set of instructions to follow.
How do you protect yourself?
There certainly is no shortage of insurance companies available to take your business and write your policy. And there is no way for you to know whether or not the company you choose will someday go under and file for bankruptcy. It is actually quite common for insurance companies to file bankruptcy, especially if there is a catastrophic event such as a hurricane or flood in an area. If one company holds several policies that file claims simultaneously, it can drive the company under.
One way to protect yourself is to choose a company that is financially strong. You can check a company’s financial viability a few different ways. One way to is to look up the company on a financial index website such as A.M. Best, Moody’s or Standard and Poor’s. These companies are independent and rate insurance companies based on their financial standing. If a company does not have a good financial standing, you should choose a different company. Even a fair rating may be a warning sign that a company is in trouble.
Another way to check on a company’s financial stability is to look the company up on your local better business bureau website. This will tell you if any complaints have been filed against the company and how the company answered those complaints. You can also look up a company through your state department of insurance. Any company selling insurance in a state is required to be licensed in the state. If a company is not licensed, you will not be protected, if they go bankrupt.
An insurance company’s financial stability is the number one thing you should look at when choosing a company. A company’s financial stability has nothing to do with how many policies it sells or how much money it brings in through premium payments. It has to do with assets, profit, and money available in reserve for a catastrophic event.
Choosing a company for your life insurance policy or any other type of insurance you need can be time consuming with so many companies available. Using the yellow pages or even a search engine can give you so many options it can be overwhelming. An easier way to get the information you need is to use an online comparison tool. This tool allows you to input all your information once and receive several rates and quotes making your decision process easier and less time consuming. Enter your zip to start now!