Life Insurance And Bankruptcy: What Happens To Your Policy?

If your life insurance company goes bankrupt, there are multiple safeguards in place to protect consumers. Consumers are protected by statutory reserves, reinsurance requirements, and guaranty associations. State guaranty associations will either take over the company policies or assign the policies to another life insurance company. You can choose to stay with the new company that takes over your bankrupt insurance company, or you can find another company.

What happens to your life insurance policy?

If your life insurance company goes bankrupt, there are multiple safeguards in place to protect your policy. Here's what you need to do and what you can expect:

Safeguards in Place

Life insurance companies are heavily regulated, and while it is rare for them to go bankrupt, there are built-in protections to safeguard consumers and ensure that claims are paid out even if the insurer files for bankruptcy. These include:

• Statutory reserves: Life insurance companies are legally required to maintain a specified amount of cash reserves to pay out claims in a worst-case scenario. The exact amount varies depending on factors such as the company's number of policyholders, potential benefits, revenue, and access to stocks and bonds.
• Reinsurance requirements: Life insurance companies purchase reinsurance, which means they buy insurance from another company. This spreads the risk of financial loss among several companies and ensures the ability to pay out claims, even during a surge in the death rate.
• Guaranty associations: All life insurance companies must be members of guaranty associations, such as the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA). These associations are funded by a portion of insurers' profits and step in to protect your policy if the insurance company goes bankrupt. They will either manage the liquidated assets and transfer coverage to another insurer or directly manage the policies until a solution is found.

What You Need to Do

Even with these safeguards in place, it's essential to stay informed and proactive. Here are some steps you can take:

• Research your provider: Before purchasing a life insurance policy, research the financial health of the insurance company. Look for strong financial ratings from agencies like A.M. Best, Moody's, or Standard & Poor's.
• Work with trusted brokers: Choose brokers who have a reputation for working with stable and reliable insurance companies.
• Review your policy regularly: Life changes, and so do your insurance needs. Regularly review your policy to ensure that your coverage remains adequate and that your provider meets your needs.
• Stay informed: Keep an eye on financial news related to your insurance provider. If there are signs of trouble, contact your broker to discuss your options.
• Diversify your coverage (optional): Consider holding multiple life insurance policies with different providers to reduce the impact if one insurer faces financial difficulties.

What to Expect

If your life insurance company goes bankrupt, here's what you can expect:

• Transfer to another company: In most cases, your policy will be transferred to another, larger company. The new company will take over all the policies of the old company, and you will continue paying premiums as usual. The new company is required to inform you of any critical changes, such as an updated insurance portal or coverage updates.
• State takeover: If the state guaranty association doesn't immediately transfer the policies, it will maintain them until it finds a permanent solution. The state may try to rescue the bankrupt company before transferring policies. Either way, the state will protect your policy to ensure you don't lose coverage.
• Continuation of coverage: Your life insurance policy will remain valid, but you may need to update your information with the new insurer.
• Beneficiaries remain protected: Your beneficiaries will still receive the death benefit. In the case of Assuris in Canada, they ensure that at least 85% of the death benefit is delivered, and it is often 100%.
• Premiums remain unchanged: Your premiums will continue to be honoured by the new company, usually without any interruption or change in terms, including premium amounts.

What happens to your premiums?

If your life insurance company goes bankrupt, your premiums will continue to be honoured by the new insurance company that assumes your policy. This means that your coverage can continue without a break. The new insurance company will usually respect the original terms of your policy, so you can expect to pay the same premiums as before.

In the case of whole life insurance, which has a cash value element, the cash value is also protected and will be transferred to the new provider.

If you are concerned about the financial stability of your life insurance provider, it is recommended to research the financial health of the company and consider working with trusted brokers who have a reputation for partnering with stable and reliable insurance companies.

What about your beneficiaries?

If your life insurance company goes bankrupt, your beneficiaries will still receive the death benefit. In Canada, Assuris, a non-profit organisation, ensures that at least 85% of the death benefit is delivered, and in most cases, beneficiaries receive 100% of the promised benefits.

In the US, guaranty associations, such as the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA), protect your policy if an insurance company goes bankrupt. The death benefit from a guaranty association is usually capped at $300,000, and the cash value is usually capped at $100,000.

In both countries, there are multiple safeguards in place to protect consumers' life insurance policies. These include statutory reserves, reinsurance requirements, and guaranty associations.

What can you do to protect yourself?

If you're concerned about your life insurance provider going bankrupt, there are several steps you can take to protect yourself:

• Research your provider: Before purchasing life insurance, research the financial health of the insurance company. Look for strong financial ratings from agencies like A.M. Best, Moody's, S&P Global, or Standard & Poor's.
• Work with trusted brokers: Choose brokers with a reputation for working with stable, reliable insurance companies. They should only recommend companies that are financially stable and reputable.
• Review your policy regularly: Life changes, and so do your insurance needs. Regularly reviewing your policy ensures that your coverage remains adequate and that you're still with a provider that meets your needs.
• Stay informed: Keep an eye on financial news related to your insurance provider. If there are signs of trouble, talk to your broker about your options.
• Diversify your coverage: Consider holding multiple life insurance policies with more than one provider. This strategy can reduce the impact if one insurer faces financial difficulties.
• Switch providers if needed: If you're concerned about your current provider's financial stability, you can switch to a different provider. However, consider the current policy, possible penalties, and changes in coverage before making a decision.
• Contact your insurance broker: If you hear that your provider is in financial trouble, don't hesitate to contact your insurance broker for advice. They can guide you through the situation and help you explore your options.
• Monitor your provider's financial ratings: Keep track of your provider's financial ratings with agencies such as A.M. Best or Moody's. A drop in financial rating can be a sign of trouble, and it's better to be cautious and consider alternatives.
• Be cautious when buying online: When buying life insurance online, only choose providers with the best financial scores. Consider working with trusted brokers who can help you verify the stability of these companies.

By following these steps, you can proactively protect yourself and your family, ensuring that your life insurance policy remains a reliable source of protection.

What should you do if your provider is unstable?

If you're concerned about the stability of your life insurance provider, there are several steps you can take to protect yourself and your policy. Here's what you should do:

Research Your Provider

Before purchasing a life insurance policy, be sure to research the financial health of the insurance company. Look for strong financial ratings from agencies like A.M. Best, Moody's, or Standard & Poor's. These agencies provide in-depth analyses of a company's financial health, so you can make an informed decision about the stability of your provider.

Work With Trusted Brokers

Choose to work with reputable brokers who have a history of partnering with stable and reliable insurance companies. Brokers can provide valuable insights into the financial stability and reputation of different insurance providers, helping you make a more informed decision.

Review Your Policy Regularly

Life circumstances can change, and so can the financial health of insurance companies. It's important to regularly review your policy with your broker to ensure that your coverage remains adequate and that your provider continues to meet your needs. This proactive approach will help you stay informed and make any necessary adjustments.

Stay Informed

Keep yourself informed by following financial news related to your insurance provider. If there are any signs of financial trouble, don't hesitate to contact your broker to discuss your options. Staying informed and proactive can help you navigate any potential disruptions smoothly.

Diversify Your Coverage

Consider diversifying your life insurance coverage by holding multiple policies with different providers. This strategy can provide an additional layer of protection in the event that one of your insurers faces financial difficulties. By diversifying your coverage, you reduce the impact of any single insurer's financial instability.

Contact Professionals for Guidance

If you have concerns about the financial stability of your life insurance provider, don't hesitate to seek professional guidance. Contact licensed insurance advisors or brokers who can help you review your current policy and explore other options if necessary. They can provide valuable insights and help you make informed decisions about your coverage.

Remember, while life insurance company bankruptcies are rare, it's always a good idea to be proactive and informed about the financial health of your provider. By following these steps, you can protect yourself and your loved ones, ensuring that your life insurance policy remains a trusted source of protection.

Frequently asked questions