What to do if your life insurance company goes bankrupt

How to feel better about the future of your family’s protection.

Logan Sachon

Logan Sachon

Published October 17, 2018

When you buy a life insurance policy, you hope that your family will never have to actually collect the death benefit that you’re paying premiums for. But if they do, you want to be confident that the insurance company is going to be around to pay it — what if your life insurance company goes bankrupt? Or runs out of money? Or has too many claims?

There are two things to know that may make you feel better about the frightening prospect of a life insurance company bankruptcy:

  1. There are built-in safeguards to pay claims even if your insurance company does go belly-up. Life insurance is a heavily regulated industry with built-in protections.

  2. You can find out about the financial health of insurers before you buy a policy. Several agencies rate insurance companies based on their financial health; if you choose a highly rated insurer, you can feel confident they’ll be around for any claims you need.

By doing a little research up front to ensure you’re choosing a highly rated and financially sound company, you can feel comfortable with your life insurer, knowing that your family is protected.

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How you’re protected if your life insurance company goes bankrupt

Life insurances companies can go bankrupt, though it’s rare. But luckily, there are three safeguards in place to ensure that even if a life insurer did become insolvent, it wouldn’t result in an inability to pay benefits to its customers.

1. Statutory reserves

Life insurance companies are legally required to keep a specified amount of reserves on hand – capital that’s available to pay out death benefits in a worst case scenario. The exact amount varies from state to state and the kind of risk an individual insurer is taking on, but it’s usually a minimum 8% to 12% of the insurer’s total revenue.

Life insurance companies have to take into account their number of policyholders, the amount of potential benefits they’d need to pay out, the revenue they’re bringing in, and more, to determine the amount of risk they’re opening themselves up to, and therefore the amount of capital they need to have in reserve.

If a life insurance company files for bankruptcy, their reserves should help ensure that outstanding claims and death benefits don’t go unpaid.

2. Reinsurance requirements

Reinsurance is insurance that insurance purchase to protect their ability to pay out claims. Insurers buy reinsurance from other insurance companies, and it’s a way to manage risk; the practice limits the loss that one insurer can suffer by spreading that risk among several companies.

Insurers in the US are only allowed to issue policies with a maximum limit of 10% of the company’s net worth unless policies are reinsured. These limits mean that if a life insurer wants to grow, they have to have reinsurance — which is insurance for insurance companies.

Reinsurance means protection for consumers. Reinsurance reduces the liability of a single insurer by spreading the risk out among multiple companies.

Let’s say you take out a million-dollar policy. If you die, your insurer pays out a million dollars to your beneficiary.

But an insurance company might cede part of the policy to a reinsurer. The premium payments are split between the insurance company and the reinsurance company (probably unbeknownst to you) and if you were to die, both companies would pay $500,000 rather than one company paying the full million.

In the case of an insurer going bankrupt, it’s very unlikely that they'll be on the hook for all of their policies, with reinsurers picking up the rest of the slack. This limits risk for everyone.

3. Mandatory membership in guaranty associations

Organizations like the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) are an important final step to provide protection; they ensure that if a life insurance company goes bankrupt, everyone else doesn’t go down with the ship.

Guaranty associations are typically funded by a portion of the collective insurers’ profits, and membership in a guaranty association is mandatory for life insurance companies. If it’s determined that a life insurance company can’t be turned around and becomes insolvent, a guaranty association steps in to help manage liquidated assets.

A guaranty association has one main purpose: They provide for the continuation of contracts that might otherwise be abandoned with the loss of the insurer. In other words, they make sure policyholders are protected.

This happens in two ways. First, the guaranty association directs liquidated assets to pay out claims before any other corporate debts or liabilities. Second, they’ll help transfer life insurance policies that are still active to other insurers so that the policyholders will continue to have coverage.

Guaranty associations act as a sort of last resort when an insurer can’t pay what’s needed from their reserves, and they can’t cover everything even with their reinsurance. While this is a true worst-case scenario, you can rest assured that you’re covered even then and that your death benefit will get paid.

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Life insurance company financial ratings and bankruptcy

While it’s good to know that if your life insurance company goes bankrupt there are protections in place, it’s better to know that your life insurance company has very little chance of going bankrupt in the first place.

There are several agencies that track the financial health of insurers and provide credit ratings for those carriers.

The best-known ratings agency is A.M. Best — it’s the rating system that Policygenius uses to choose which carriers we work with (see more about their rating system in the table below). We only work with insurance companies that have at least an “excellent” (A-) financial rating, so when you purchase insurance through Policygenius, you know your policy is going to be with a financially healthy carrier with little chance of bankruptcy.

Read about the best life insurance companies and find out their A.M Best scores.

A.M. Best financial ratings and definitions

Rating categoryRating symbols and notchesCategory definitions
SuperiorA++ to A+Assigned to insurance companies that have, in our opinion, a superior ability to meet their ongoing insurance obligations.
ExcellentA to A-Assigned to insurance companies that have, in our opinion, an excellent ability to meet their ongoing insurance obligations.
GoodB++ to B+Assigned to insurance companies that have, in our opinion, a good ability to meet their ongoing insurance obligations.
FairB to B-Assigned to insurance companies that have, in our opinion, a fair ability to meet their ongoing insurance obligations. Financial strength is vulnerable to adverse changes in underwriting and economic conditions.
MarginalC++ to C+Assigned to insurance companies that have, in our opinion, a marginal ability to meet their ongoing insurance obligations. Financial strength is vulnerable to adverse changes in underwriting and economic conditions.
WeakC to C-Assigned to insurance companies that have, in our opinion, a weak ability to meet their ongoing insurance obligations. Financial strength is very vulnerable to adverse changes in underwriting and economic conditions.
PoorDAssigned to insurance companies that have, in our opinion, a poor ability to meet their ongoing insurance obligations. Financial strength is extremely vulnerable to adverse changes in underwriting and economic conditions.

Further reading

What does life insurance cover?

When will life insurance pay out, and when will it not? Learn what scenarios are covered by your policy.

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What are life insurance premiums?

Premiums keep your policy in-force. Learn how they're determined and how you can lower them.

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What are life insurance riders?

Customize your policy and get additional benefits and protection with must-have riders.

Read

Why life insurance isn't an asset

Life insurance protects your family's financial future - but should you consider it an investment?

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Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.