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Q: What Happens When An Insurance Company Goes Bankrupt and What Happens To My Policy?

2012 November 6

Thankfully we have only read about this experience and never had one of the companies we represent go into bankruptcy or insolvency which is the term used in the Insurance industry. If an insurance company goes bankrupt or is otherwise unable to pay its claims there is a safety net in each state known as a Guaranty Fund which works similar to the way the FDIC protects deposits in banks. Each state charges Insurance Companies a tax on their premiums that goes to an insolvency fund that would pay claims up to a certain state limit if the company was capable financially to do so on their own. The company is taken over by the Insurance Department of the State they are domiciled in and goes through a period of rehabilitation. This generally involves the Insurance Department reorganizing the company and in most cases finding a new company to buy the assets of the failing company. If the assets being bought do not generate enough to cover the liabilities of the company, then the Guaranty Fund makes up the difference and, in most cases, the insured person is made whole and their policy or claim protection continues. In the event that no buyer is found, then the company’s assets are liquidated and the Guaranty Fund will provide protection up to the state limit for those with a pending claim or outstanding premium. This is a very rare event and the advantage of term insurance is that you do not have a lot of money “invested” in a failing company such as with a cash value type plan and you could simply apply elsewhere. In short, it is definitely an experience to avoid but having a Term Life plan does minimize some of the complications.