How Do I Know My Insurance Company Will Still be in Business in 10 Years? (and be able to pay out)

It’s your worst nightmare.

… you paid all those years into your spouse’s life insurance policy and after he passes away, you find his insurance company is going bankrupt and may not be able to pay out.

Does this really happen?  If so, what happens to my pay out?

Insurance is a very heavily regulated industry and every state in the United States has its own Department of insurance.

The Department of Insurance in your state is designed to monitor the financial standing of each insurance company that is licensed to sell insurance within the state you live. If your insurance company starts to show signs of financial problems, the Insurance Department or Commissioner will step in to make sure the company does not become insolvent, or unable to meet its financial obligations.

In addition to the Department of Insurance, there is also the National Organization of Life and the Health Insurance Guaranty Association. This organization is in place to guarantee your insurance policy if an insurance company becomes insolvent. Every insurance company in the United States must pay into this organization to protect its policyholders. The National Organization of Life and Health Insurance Guaranty Association will take over to make sure any existing policy is honored or moved to another insurance company through a process known as reinsurance.

Each insurance company practices a process known as reinsurance. Reinsurance essentially shares the risk of one insurance company’s obligations with other insurance companies. In other words, if the company you purchase your insurance from does not have enough money on hand to pay its claims, another insurance carrier will step in and take over your policy. If this happens the coverage, term, and payments will remain exactly the same.

If the insurance company is beyond being saved, and no company is able to step in and take over the existing clients, there is a process known as liquidation. During liquidation, the insurance company must cease all new policy sales and all renewal policy sales.

Liquidation involves the Insurance Commissioner in your state selling off all of the company’s assets to generate money to pay claims and any other outstanding debt. This process includes selling all of the company’s property including buildings, office equipment, computers, furniture, etc. If this were to occur, the company’s policyholders are notified as are any other individuals or businesses with a financial interest in the company. This notice will contain a final date for filing a claim and the date the policy will expire, this date is 30 days after the date on the liquidation order.

If an insurance company is forced to liquidate, The National Organization of Life and Health Insurance Guaranty Association will pay up to $300,000 of the policy, some states pay more. If your policy exceeds $300,000, the insurance company is still liable to pay the additional amount from the proceeds of the sale of its assets. Claims are paid before any other creditor so most likely the full face amount of the policy or very close to it would be paid out if a claim is filed after an insurance carrier becomes insolvent.

This is why it is important to check the financial ratings for any insurance company you decide to do business with. Make sure the company is licensed to do business within your state and that they carry an A or better rating with A.M. Best. A.M. Best evaluates insurance companies and their financial holdings. They are non-partial and are arguably the most trusted credit and financial rating company in the industry today.

Here at JRC insurance group, we only work with A or better rated companies that have never failed to pay a valid claim. We will match you up with an agent who is licensed in your state, and they will shop all of the top rated carriers that are licensed within your state to find you the best deal available.

It is very rare that a company would fall into financial problems, however; in 2008, we saw AIG come close to walking this line. When AIG fell into financial trouble due to the troubles in the mortgage industry, the government stepped in, loaned them $85,000,000 and they were able to stay afloat, pay the government back with interest and continue to write insurance.

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