A common question that shoppers ask is, “What If My Life Insurance Company Goes Bankrupt?” This is a great question.
Picture this: You bought your policy from the best life insurance company (or so you thought). You’ve paid your life insurance premiums for years. You’re stress free knowing your family is taken care of if you were to die. Then you read the news and see that your life insurance company filed bankruptcy. Panic sets in and now you want to know what happens if a life insurance company goes bankrupt.
Bankrupt Life Insurance Companies
Several decades ago, the chance of a life insurance company going bankrupt was very rare. However, midway through the 1990s several big name life insurance companies initiated the insolvency process.
Life Insurance Company Bankruptcy [6 Steps]
Did you know that insurance can’t declare bankruptcy like other types of businesses?They go through a liquidation or insolvency receivership process by the insurance department in that particular state.
Let’s now look into 6 common steps of this process
1. When Life Insurance Companies Have Financial Trouble
Life insurance companies are watched over and regulated by their state’s insurance department. They make sure that life insurance policyholders are protected from the financial woes of the company. The insurance commissioner will initiate their processing if a life insurance company experiences financial distress where they can’t pay their claims. Each state will dictate the laws and there are financial saving efforts, called rehabilitation, to assist the carrier to try and get them back on track. If rehabilitation fails, the life insurance carrier is labeled insolvent. The state’s life insurance commissioner then asks the court to begin liquidation of the life insurance company.
2. The Insurance Commissioner’s Duties
What exactly is the role of the state’s Insurance Commissioner? The job of each state’s insurance commissioner is to regulate and monitor all of the insurance activity in their state. They are elected by- or appointed by the governor of the state. Part of the insurance commissioner’s job description is to decide if an insurance company in their state is to be confirmed as insolvent. If so, they then turn to the state court to get authorized to begin seizing company assets as well as operation of the carrier. This occurs during the pending liquidation or rehabilitation period.
3. The Special Deputy Receiver
By law, when the state’s insurance department or commissioner takes control of a life insurance company- they are now the liquidator or rehabilitator of that company. The life insurance company’s operations are now handled by the department or commissioner. The state’s insurance commissioner has many responsibilities, so they can use someone to supervise the carrier’s activities. This someone is called a Special Deputy Receiver and they can be independent or an employee of the insurance department for the state. If the Special Deputy Receiver is an independent professional, they are typically an expert in accounting or legal issues.
The special deputy receiver will be in charge of looking over the company’s accounting, liabilities and assets. They will also handle the estate of the life insurance company. By administering all of these things, they look to increase the carrier’s assets and shift them to cash. If that is successful, the receiver will allocate the cash to all of the the creditors that submitted claims. These claims are setup in a hierarchy according to payment priority. The payment priority is determined by the laws of each state, but policyholders are paid first before creditors.
4. Guaranty Associations
Life insurance policyholders need to be protected if a life insurance company becomes insolvent. This is the purpose of each state’s guarantee association. For the most part, every life insurance company has to be a member or the state’s guarantee association if they have a license to sell insurance products.
With the cooperation of the special deputy receiver and commissioner, the guaranty association helps with the liquidation planning. The guaranty association will give policy holders coverage as soon as the liquidation has been ordered. The amount of coverage that they provide will be determined by each state’s laws.
5. Guaranteed Coverage
What is the guaranteed coverage you could receive if the life insurance company became insolvent? The majority of states provide coverage that is consistent with the NAIC Model Act. With that said, each state varies with their maximum limits and you’ll need to find out what your state association says in order to confirm the specific benefit.
The amounts below are typically what you’ll find with the NAIC Model Act. As you can see, the aggregate benefit level in the majority of states is $300,000 with individual life insurance.
- $100,000 in cash surrender or withdrawal values for life insurance
- $300,000 with life insurance death benefits
6. How Guaranteed Coverage Is Funded
State guaranty associations are initiated when life insurance companies become insolvent and there are a deficit of funds to meet their financial responsibilities to the policyholders. There are 2 main funding sources for the guarantee associations that produce coverage to policyholders.
- Subrogation Rights: The guaranty association have proportional shares of the failed insurance company’s remaining assets. These assets can be used to pay claims by the guaranty association.
- Shares: Life insurance companies that do business in that particular state will be assessed a share of the sum needed to meet the share of the guaranty association and their covered claims that are not funded from estate assets. The appraised total of the life insurance company is factored by the total amount of life insurance premiums that they have collected in that particular state.
Life Insurance Companies and Reinsurers
Did you know that life insurance companies also have insurance? You read that correctly. Reinsurers add an extra level of protection for the life insurance companies. They also provide consumers an added level of security. You see unless insurance companies are reinsured, they can’t issue life insurance policies over a maximum of ten percent of their net worth. Usually this means that they all get reinsurance because they can’t grow financially without it.
What If My Life Insurance Company Goes Bankrupt – Final Thoughts
Make sure you always buy a life insurance policy from a company with excellent financial ratings. The best way to go about this is by getting the financial ratings of any company you’re going to buy from. There are companies that grade life insurance companies such as A.M. Best, Moody’s and Fitch. Try and focus on companies with a rating of “A” or better. It isn’t guaranteed that an “A” rated company will not go bankrupt, but it’s very unlikely.
If you have any questions about the best life insurance companies or anything life insurance related, just reach out to us. We’d be happy to help. If you’d like to learn more about how to save money on life insurance, be sure to check out our Life Insurance 101 page to get shopping tips and more.