Can my life insurance company go bankrupt?

Life insurance companies are subject to market forces but there are regulations in place to protect your coverage.

Nupur GambhirAmanda Shih author photo

Nupur Gambhir & Amanda Shih

Published March 24, 2020

KEY TAKEAWAYS

  • The best way to safeguard yourself from a life insurance company going bankrupt is to choose a licensed insurer in good financial standing

  • Bankruptcy for life insurance companies is rare because of reinsurance, which is just an insurance policy for insurance companies

  • If your life insurance company goes bankrupt, there are regulations in place to ensure that your beneficiaries still receive some death benefit

When you buy a life insurance policy, you want to be confident that the insurance company is going to be around to pay your beneficiaries — but how do you make sure your insurer is protected from market volatility?

Luckily, life insurance companies are heavily regulated with built-in protections that safeguard consumers and pay claims even if your insurance company does go belly-up. But, to protect yourself, you should evaluate the financial health of insurers before you buy a policy.

Choosing a financially strong life insurance company

The first thing you can do to safeguard yourself from a life insurance company’s financial collapse is to choose a licensed insurer that is in good financial health. 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.

You should consider the insurer’s financial standing with credit agencies such as A.M. Best, Standard & Poor’s, and Moody’s.

A.M. Best financial ratings and definitions

The best-known ratings agency is A.M. Best — it’s the rating system that Policygenius uses to choose which carriers we work with. 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.

See more about their rating system in the table below.

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.

Policygenius’ life insurance reviews break it down for you so you can get a sense of each life insurance company’s financial strength.

Is life insurance FDIC insured?

The FDIC does not insure life insurance companies or policies, even if you buy the policy from an FDIC-insured financial institution. The FDIC’s function is to provide deposit insurance, meaning they insure money deposited in banks, such as checking and savings accounts and money orders. As a rule, the agency does not cover insurance products or investment accounts. However, other protections exist within insurance companies and at the state level to protect at least part of your insurance proceeds.

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What happens if your life insurance company goes bankrupt?

Previous economic crises have better prepared the life insurance industry for market volatility. No life insurance companies have declared bankruptcy since 2008, and before liquidating an insurance company’s assets, regulators will first work towards financial rehabilitation and solvency.

Although it’s rare when a life insurance company goes bankrupt, there are 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 — or capital that’s available to pay out death benefits in a worst-case scenario. The exact amount varies from state to state and risk to risk, 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 the amount of capital they need to have in reserve.

Similarly to other large businesses, life insurance companies also hold stocks and bonds that allow them to diversify their access to capital.

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

2. Reinsurance requirements

Reinsurance is the protection that life insurance companies purchase to protect their ability to pay out claims and manage risk; the practice limits the loss that one insurer can suffer by spreading that risk among several companies. These protections are also what make it possible for life insurance companies to pay out when there’s a surge in the death rate — whether that be from a natural disaster or a global health crisis.

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 be reinsured.

If you take out a million-dollar policy and die, typically your insurer would pay out a million dollars to your beneficiary. But an insurance company might cede part of the policy to a reinsurer if they need financial support. The premium payments are split between the insurance company and the reinsurance company (probably unbeknownst to you) and 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 and ensures that your beneficiaries still get the death benefit.

3. Mandatory membership in guaranty associations

Guaranty associations 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 would step in to help manage liquidated assets and payout to creditors and beneficiaries. If the policyholder is still alive, their policy is transferred to another insurer so that they can maintain coverage.

If a life insurance company defaults and the policyholder passes away, the beneficiaries will still receive the death benefit, but the amount will vary from state to state. The death benefit paid out is usually capped at $300,000 — and $100,000 for the policy’s cash value if there is one. The amount paid out could vary based on what state you reside in and can be higher in some states, like New York.

Are guaranty associations reliable?

Guaranty associations act as a last resort for insurers that don’t have enough in reserves or reinsurance to pay out a death benefit claim. While this is a true worst-case scenario, they still ensure some coverage and a death benefit payout.

Since its founding in 1983, the National Organization of Life and Health Insurance Guaranty Associations has transferred 2.6 million policies and paid out about $6.9 billion in death benefits. Guaranty associations like NOLHGA are regulated by state legislatures to ensure legal compliance and consumer protection.

Can COVID-19 impact the financial health of your insurer?

A volatile market due to the coronavirus doesn’t necessarily have negative implications for your life insurance policy. Thanks to capital reserves, reinsurance, and a diversification of investments, life insurance companies in good financial condition are better prepared for a financial downturn than they have been in the past; companies have their own safety net in place to safeguard against market upheaval.

Insurance Expert

Nupur Gambhir

Insurance Expert

Nupur Gambhir is an insurance editor at Policygenius in New York City. Previously, she has worked in marketing and business development for travel and tech. She has a B.A. in Economics from Ohio State University.

Insurance Expert

Amanda Shih

Insurance Expert

Amanda Shih is an insurance editor at Policygenius in New York City. Previously, she worked in nonfiction book publishing and freelance content marketing. Amanda has a B.A. in literature and communication from New York University.

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.

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