What happens if your life insurance company goes bankrupt?

Reinsurance agreements and state insurance regulations protect your coverage, even if your life insurance company files for bankruptcy.

Headshot of Policygenius editor Nupur GambhirAmanda Shih author photo


Nupur Gambhir

Nupur Gambhir

Senior Editor & Licensed Life Insurance Expert

Nupur Gambhir is a licensed life, health, and disability insurance expert and a former senior editor at Policygenius. Her insurance expertise has been featured in Bloomberg News, Forbes Advisor, CNET, Fortune, Slate, Real Simple, Lifehacker, The Financial Gym, and the end-of-life planning service Cake.

&Amanda Shih

Amanda Shih

Editor & Licensed Life Insurance Expert

Amanda Shih is a licensed life, disability, and health insurance expert and a former editor at Policygenius, where she covered life insurance and disability insurance. Her expertise has appeared in Slate, Lifehacker, Little Spoon, and J.D. Power.

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Expert reviewed

This article has been reviewed by a licensed Policygenius expert to ensure that sources, statistics, and claims meet our standard for accurate and unbiased advice.

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Kristi Sullivan, CFP®

Kristi Sullivan, CFP®

Certified Financial Planner

Kristi Sullivan, CFP®, is a certified financial planner and a member of the Financial Review Council at Policygenius. Previously, she was a regional consultant at Fidelity Investments for nine years.

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When you buy a life insurance policy, you want to be confident that the insurance company will be around to pay your beneficiaries even if the financial markets are taking a hit.

Luckily, life insurance companies are heavily regulated, with built-in protections that safeguard consumers and pay claims even if your insurance company does file for bankruptcy. To be safe, evaluate the financial health of an insurer before you buy a policy.

Key Takeaways

  • When buying a policy, choose a licensed insurer in good financial standing

  • Insurance company bankruptcies are rare because of reinsurance, which is an insurance policy for insurance companies

  • Regulations ensure that your beneficiaries still receive some death benefit even if your life insurer goes bankrupt

You're protected if your life insurance company goes bankrupt

Insurance company bankruptcies are rare; no life insurance companies have declared bankruptcy since 2008. [1] And, previous economic crises have helped the industry better prepare for market instability.

Regulators will usually try to rehabilitate an insurance company before liquidating it. If that doesn't work, the company's statutory reserves, reinsurance agreements, and state guaranty associations will help it meet its obligations to customers.

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1. Statutory reserves

Life insurance companies are legally required to keep a specified amount of cash reserves on hand 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.

The actual amount kept in reserve depends on a company's number of policyholders, potential benefits it might need to pay out, revenue, access to stocks and bonds, and more.

2. Reinsurance requirements

Reinsurance is protection that life insurance companies buy to insure their ability to pay out claims. By insuring their policies, insurance companies spread their risk of financial loss among several companies. Reinsurance also helps life insurance companies pay out when there’s a surge in the death rate — whether from a natural disaster or a global health crisis.

Unless their policies are reinsured, insurers in the US can only issue policies with a maximum limit of 10% of the company’s net worth. [2] So if a life insurer wants to grow, it has to be reinsured.

For policyholders, it means that if your insurer goes bankrupt, its reinsurer can pick up 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) protect your policy if a provider does go under. Guaranty associations are funded by a portion of insurers’ profits, and membership in a guaranty association is mandatory for life insurance companies.

If a life insurance company is deemed insolvent, a guaranty association manages any liquidated assets and fills any obligations to creditors. The association transfers coverage for any living policyholders to another insurer.

If a policyholder passes away, their beneficiaries still get the death benefit, but the amount will vary from state to state. The death benefit from a guaranty association is usually capped at $300,000 and $100,000 for the policy’s cash value if there is one. [3] The amount paid out could vary based on what state you reside in and can be higher in some states.

Are guaranty associations reliable?

Guaranty associations are regulated by state governments to ensure legal compliance and consumer protection.

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. [4]

Choosing a financially strong life insurance company

The first thing you can do to protect yourself from a life insurance company’s bankruptcy is to choose a licensed insurer that is in good financial health. You can research an insurer’s financial standing with credit agencies such as A.M. Best, Standard & Poor’s, and Moody’s.

It’s good to know that there are protections if your provider files for bankruptcy, but it’s better to know that your life insurance company has very little chance of going bankrupt in the first place.

A.M. Best financial ratings and definitions

The best-known ratings agency is A.M. Best — it’s one of the rating systems that Policygenius uses to choose which providers 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.

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

→ Read more about A.M. Best's rating system

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 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. [5]

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. In addition to state regulatory protections, companies have their own safety net in place to safeguard against market upheaval.

Frequently asked questions

Is life insurance backed by the government?

Life insurance is regulated by state governments. States require insurers to join guaranty associations that back policies up to a certain amount and many insurers insure their customers' policies.

Can beneficiaries get a payout if an insurance company goes bankrupt?

A reinsurance company or guaranty association will cover some or all of any unpaid claims if an insurer goes out of business. Guaranty associations only pay up to a limit that varies by state.

What does an insurance guaranty association do?

A guaranty association protects consumers by paying out claims or finding new providers for existing policyholders if an insurer goes out of business.