What happens if my life insurance company goes out of business and is liquidated?

When a life insurance company becomes unable to meet its financial obligations, the state insurance commissioner is responsible for assuming and transferring those obligations. For most policyholders, there are no major impacts, but the policy is, instead, assumed by another, solvent company.

When the insurance commissioner assumes control his or her first task is to determine whether the company can be rehabilitated. If it can, then the finances of the insurer are calculated and distributed to the debtors of the company. Once that has been completed, the company is allowed to continue operation.

If the company cannot be rehabilitated, then the situation is handed over to a state guarantor, known as a guaranty association or bank. This agency is then responsible for policies written by the insolvent company until such time as those assets are transferred to another company. Every state has a guaranty association whose primary duty is to prevent customer losses related to insolvency of financial institutions.

In most cases, the insurance policies of the insolvent company are not affected seriously. In some rare cases, the policy may be terminated and any cash value accumulated in the policy returned to the policyholders, up to the limits of the law. Those limits are established on a state by state basis, and you can get the details from the Department of Insurance or Insurance Commissioner in your state of residence. In the event of a severe financial crisis, you may only receive a percentage of the face value, as the total assets of the insolvent company are divided as equally as possible among all affected policyholders.

To avoid becoming involved in such a situation, be careful to check the financial standing and long term outlook of any insurance company you may deal with. These ratings are available from companies such as the A.M. Best Company, which are independent companies that look at long and short term financial records and estimates to determine how well insurance is performing. By limiting your insurance purchases to companies with high ratings, you can minimize the possibility of your insurance provider becoming insolvent, effectively minimizing your long term risk.