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What If My Life Insurance Company Goes Out of Business?

by Scott G on October 29, 2012

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My Life Insurance Company Goes Out of Business?

A common and legitimate question a consumer may ask when shopping for life insurance is, “What if the company goes out of business or is unable to pay a claim?”

The good news for consumers is that the life insurance industry is heavily regulated and monitored. Thus, large scale life insurance companies’ insolvencies have become rare.  Also, if you chose a highly rated insurer by an independent rating agency such as AM Best or Standard & Poor’s, then the odds of misfortune go down even further.  As a measure of security, each state has what is called a guarantee association.  Life insurance companies are for the most part regulated at the state and not on the federal level.  Life insurance companies are required to become members of the state’s life and health guaranty association in order to do business in that state.  Similar to the FDIC and the banking industry, the state guarantees benefits up to a specific amount.  The amounts are determined by the each state, so you would need to check with your state guaranty association to see what is specifically covered by your state.  Guaranteed amounts typically range from $100k to $500k, while most states (but not all) cover up to $300k in life insurance on death benefits and $100k in cash surrender value.  The maximum aggregate in most states is again $300k for all claims, life, auto and home.

Consequently, policies larger than the state’s guaranteed amounts would not be assured.  However, in most cases, the claim would not go unpaid due to the high regulation and oversight as mention above.  State regulators require insurance companies to maintain solvency, or cash on hand to meet anticipated claims.  Also, if the insurance company became insolvent, the state can order rehabilitation to restore solvency. Also, most of insurance companies invest the majority of their money in lower risk investments like bonds.

What If My Life Insurance Company Goes Out of Business in Closing

With such heavy regulation that insurance company’s must adhere to, and state guarantee association or guarantee funds as previously mentioned, couple that with the independent ratings agencies that asses the financial strength and ability to meets it obligations to policyholders, and  you can see that the chances of a highly rated life insurance company not being able to pay out a claim is highly unlikely.

If you have any questions about the state guarantee associations or financial strength of a particular company make sure you ask an agent.  Also, if you have any questions please do not hesitate to contact me directly.

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