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. However, it’s still a good idea to evaluate the financial health of a prospective insurer before you buy a policy.
How are you protected if your life insurance company goes bankrupt?
Insurance company bankruptcies have gone bankrupt before, but it happens very rarely. [1] And previous economic crises have helped the industry better prepare for market instability.
Regulators will usually try to rehabilitate an insurance company before it’s sold to another insurer, or otherwise liquidated. If the insurer can’t make a financial recovery, the company’s statutory reserves, reinsurance agreements, and state guaranty associations will help it meet its obligations to customers.
1. Statutory reserves
Life insurance companies are legally required to keep a specified amount of cash reserves on hand to pay out claims 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.
Learn more about how life insurance companies make money
2. Reinsurance requirements
Life insurers buy reinsurance, which is basically when a company purchases insurance from another company. This protects the insurer’s ability to pay out claims. By insuring their policies, insurance companies spread their risk of financial loss among several companies instead of just one.
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 U.S. 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 if you die.
3. Mandatory membership in guaranty associations
Guaranty associations, such as the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA), protect your policy if an insurance company goes bankrupt. Guaranty associations are funded by a portion of insurers’ profits, and membership in a guaranty association is mandatory for life insurance companies.
If an insurer becomes 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. In that situation, 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 the cash value is usually capped at $100,000, if there is one. [3] The amount paid out could vary based on your state.
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 assisted its member guaranty organizations in guaranteeing more than $28.7 billion in coverage benefits and contributed $9.7 billion toward fulfillment of insurer promises. [4]
How can you choose a financially strong life insurance company?
You can research an insurer’s financial standing with credit agencies such as AM Best, Standard & Poor’s, and Moody’s. The is the first step you can take to protect yourself from a life insurance company’s bankruptcy
It’s also good to know that there are protections if your insurer 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.
AM Best financial ratings and definitions
One of the best-known ratings agencies is AM Best — it’s one of the rating systems that we at Policygenius use to choose our partner companies. 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 will be serviced through a company 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 Policygenius’ life insurance ratings methodology
Is life insurance FDIC insured?
The FDIC doesn’t 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 doesn’t cover insurance products or investment accounts. [5]
Learn more about how to understand your life insurance policy
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 insure policies to a certain amount.
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 insurance companies to service for existing policyholders if an insurer goes out of business.
