What Happens if My Life Insurance Company Goes out of Business?
Companies get bought and sold all the time, and insurance companies are no different. When any business is acquired through a merger or acquisition, the assets (and liabilities) of the acquired company go along for the ride and become assets of the new company. In the case of an insurance company, this means your insurance policy will be assigned to or acquired by the new company and stay in full force and effect, so long as you continue to render your premiums to the new company.
What if the company folds instead of getting acquired? This rarely happens with the largest insurance companies; many have been around for well over a hundred years and show no signs of going away. But perhaps you thought you’d save money by going with a smaller company that only has a short history in business and perhaps a less than stellar reputation. If the insurance company that sold you your policy goes out of business, are you out of luck? Not necessarily.
Enter the Guarantee Association
State governments recognize the extreme hardship that could befall a family who pays into a life insurance policy for years or decades, but the company goes under and no one is around to pay benefits to the policyholder or beneficiaries. To remedy the situation, most states have laws on the books creating guarantee (or guaranty) associations. These associations are not government agencies, although they are created or required by state law. Instead, they are associations made up of all the insurance companies licensed to do business in the state, and they are funded by assessments made against the insurance companies, not tax dollars.
If a life insurance company goes insolvent, it goes into receivership, and its assets are liquidated. At this point, the guarantee association steps in and continues the coverage of the now-defunct company’s policies. Alternatively, the association might transfer the old policies to a new company, one that has a better reputation and a more solid financial footing. Either way, you should be notified by the receiver about any changes in the process for filing a claim, if any. Of course, you’ll still need to continue paying your premiums to keep your policy in force, and you’ll be told whether to make those payments to the association or a new company.
If your policy gets taken over by the guarantee association, keep in mind that you might not get the entire value of your policy. Instead, payment guarantees typically only cover a portion of the death benefit or a portion of the cash value of a permanent life insurance (whole life) policy. In California, for example, the California Life & Health Insurance Guarantee Association only pays 80% of a death benefit up to $300,000 and 80% of a policy’s cash value up to $100,000. Although these amounts might not capture 100% of the benefit you originally bargained for, they are certainly better than nothing and provide real financial help.
The other 20% of your policy benefit that went unpaid is a claim against the estate of the insolvent company, and you can get in line with other creditors as the company’s assets are liquidated. In some cases, you might be able to recover the remainder of the benefit from the receiver, although this is far from guaranteed.
Why Have I Never Heard of This?
You might not have ever heard of a guarantee association before. Insurance companies and their agents are prohibited by law from bringing it up and using it as a selling point by telling you that you will be protected should something happen to their company. It’s also important to know that not all life insurance companies are covered by guaranteed payments (such as companies not licensed to do business in the state) and not all benefits are covered (such as the non-guaranteed portion of a variable life insurance contract sold by prospectus or benefits for which the policyholder assumed the risk of loss). If you need to know whether the company or your benefits are covered, you are better off asking the guarantee association or your state department of insurance than the insurance company itself.
How Can I Avoid Getting Into This Mess in the First Place?
You might think that premium cost is a prime consideration when shopping for life insurance, but even more important is the peace of mind that comes from knowing the company will still be there and financially solvent when you or your beneficiaries need it to be. A key indicator is a company’s financial rating. Insurance companies hire rating services such as Standard and Poor’s, A.M. Best, and Moodys to evaluate and rate them. You can generally count on the rating provided by one of these services as reliable and trustworthy. Choose a well-rated company, and you can buy with confidence.
You can also call your state insurance department. They license and regulate insurance companies authorized to do business in the state and might have some information about the company you are looking into. For instance, the California Department of Insurance website lists the hundreds of insurance companies licensed to do business in the state and provides basic information, allowing you to find out information like where they are from, how long they’ve been in business in the state, and any old company names they went under.
Get Legal Help if Your Claim Is Denied
Doing your homework can help you buy a policy from a company that will still be around and financially able to pay your claim. Getting them to actually pay that claim is another matter entirely. If your life insurance company is denying your claim based on an alleged policy lapse, contestability issues, or other reasons that might not hold water, get an experienced insurance law attorney on your side to advise you, advocate for you, and help you get the life insurance benefits you need and deserve.