Will My My Insurance Company Still Be in Business in 10 Years?
It's your worst nightmare.
You paid all those years into your spouse's life insurance policy and after he or she passed away, you find out the 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?
Rest assured, there is a process in place prevent this scenario from happening. This article will discuss how life insurance is regulated, the process of reinsurance, and what steps are taken if reinsurance is not an option.
Quick Article Guide
Here’s what we'll cover in this post:
Life Insurance Regulation
Life 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.
If anything were to happen, the National Organization of Life and Health Insurance Guaranty Association would take over to make sure any existing policy is honored or moved to another insurance company; this process known as reinsurance.
Reinsurance
Each life insurance company practices reinsurance. This process essentially shares the risk of one insurance company’s obligations with other insurance companies.
In other words, if the company you purchase your life 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.
What if the Company Can't Be Saved?
If the life 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 so important to check the financial ratings for any life 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 is a corporation that 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.
It's important to note that it is very rare that a company would fall into financial problems. However, in 2008, we saw the life insurance company 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 and loaned them $85,000,000. Because of this, they were able to stay afloat, pay the government back with interest, and continue to write insurance!
Questions? We Can Help!
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 to find you the best deal available.
As a non-partial, no-fee brokerage, our goal is match our clients with the best life insurance options available by shopping and comparing rates from more than 50 highly-rated insurers. By having access to dozens of companies and their guidelines, we’re able to save our client’s time and money.
Most importantly, our services as completely free, and there is no cost to apply for coverage. Give us a call toll-free today at 855-247-9555, or you can request a free quote online to compare rates and options from dozens of insurance companies in less than a minute.
Clifford Pendell
Managing Partner and Co-founder
Cliff is a licensed life insurance agent and one of the owners of JRC Insurance Group. He has helped thousands of families of businesses with their life insurance needs since 2012 and specializes with applicants who are less than perfect health. In his spare time he enjoys spending time with family, traveling, and the great outdoors.
Ask Our Experts
Leave your question below and one of our insurance agents will give you a detailed answer.