What happens if your insurance company goes out of business? When AIG was on the verge of bankruptcy during the Great Recession in 2008, the US government stepped in to rescue the insurance company, which was considered “too big to fail”.
Bailouts don’t happen every day, and you probably shouldn’t count on Uncle Sam to bail your insurance company out if its financial situation deteriorates.
However, you’re not out of the woods yet.
Insurance companies are regulated by the states, and all 50 states have systems in place that protect policyholders in the event of an insurance company going out of business.
It’s important to understand how this process works and what kind of protection you’ll get.
You should also know what steps you can take to ensure that you’re protected if your insurer goes out of business, so you don’t have to wait for the state to bail you out.
Why Insurance Companies Go Out of Business
Insurance companies don’t go out of business all of a sudden, even though the industry is heavily regulated. Insurance companies fail for a number of reasons, such as underselling their products and having higher-than-expected insurance claims.
Penn Treaty, for example, went out of business in 2017 after filing for bankruptcy. The company’s bankruptcy was one of the biggest in US history.
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Insurance company insolvency in the United States reached its peak in 1992 when over 50 companies filed for bankruptcy.
The number has since declined to less than 10 companies a year, but for policyholders, that’s still more than one insurer going out of business a year.
How States Protect Insurance Policyholders
When an insurance company finds itself in financial difficulty, the insurance guaranty system of the state in which the insurance company has its registered office will step in.
All 50 states, plus the District of Columbia (DC) and Puerto Rico (Puerto Rico) have an insurance guaranty association, according to the National Conference of Insurance Guaranty Funds.
What to Expect if Your Insurance Company Fails
In the event of an insurance company’s insolvency, the State Guarantee Association and Guarantee Fund step in.
The association transfers the insurer’s policies to another insurer or continues to provide coverage to policyholders.
Therefore, it is important that policyholders continue to pay premiums if the state takes over the insurer.
By paying premiums, policyholders keep their coverage intact. Alternatively, they may choose to take out a policy with a different insurance company. This is usually easier to do for auto and homeowners than life insurance policies.
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If the insurance company doesn’t have enough assets to pay policyholders’ claims, the Guarantee Association will use the company’s assets and the guarantee’s funds to make payments.
However, there is a limit on how many claims can be paid. The majority of states limit benefit payments to the following:
- Life insurance death benefits: $300,000
- Cash surrender or withdrawal value for life insurance benefits: $100,000
- Annuity benefits: $250,000
- Present value of annuities
- Medical or hospital benefits: $500,000
- Other health insurance benefits;
- Long-term care insurance benefits;
- Disability insurance benefits;
- Property and casualty claims;
- Workers compensation claims with no cap
If you have an insurance policy with benefits that exceed these limits, you or your beneficiaries may be disappointed that you won’t receive the full amount of money you paid for your policy premiums. However, remember that anything is better than none.
You may be able to file a claim with the company’s “estate” to get full payment if your claim exceeds the state limit.
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However, your claim will be added to the claims of all of the company’s creditors, and it may take years for you to see any money from the company, according to the National Conference of Insurance guarantee funds.
How to Avoid Insurers That Might Go Out of Business
Instead of relying on a State Guarantee Association (GSA) to protect your policy, you can conduct your own due diligence on insurance companies to ensure they are financially sound.
Insurance companies are evaluated based on their financial performance by independent agencies, each with its own rating system and criteria.
When is it Time to Switch Insurance Companies?
If your insurance company’s rating is low, change your policy. It’s easy to cancel your old policy, and you can get a full refund.
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However, you’ll pay a higher premium if you leave your policy. Before changing your policy, speak with a financial advisor or a life insurance agent.