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What Happens When an Insurance Company Goes Bankrupt?

Brian FisherJuly 27, 2018

Insurance

The other day, I was reviewing insurance coverage with a client and she asked, “Do insurance companies go bankrupt like banks? What happens if my insurance company goes bankrupt?”

Insurance companies are generally more stable financially than banks. They use less leverage and most of their financial obligations are long-term. Death benefit obligations for life insurance policies issued will not all be due at one time. Also, payments under many annuity contracts are not due in a lump sum, they are spread out over the lifetime of the individual receiving payments. Contrasted with the banking industry, where a given bank or banks could face a crisis if all customers were to simultaneously withdraw funds. If everyone goes down to the bank and pulls out their money, the bank can be hit immediately with a crisis. According to the FDIC, 465 banks failed from 2008 through 2012, while only 11 insurance companies failed during that same time. But are there any additional protections in place if my insurance company goes bankrupt?

Banks are regulated at the federal level. When a bank fails, the FDIC provides reimbursement for depositors up to $250,000. Insurance companies are regulated at the state level. Similar to FDIC protection for banks, insurance companies are backed by state guarantee associations. These associations help pay claims if an insurance company goes bankrupt. Each state guarantee association has different levels of protection. No state offers less than $100,000 in life insurance protection. And some states, like New York, offer up to $500,000. You can check with your state to see the limits of protection by clicking here.

If an insurance company gets into financial trouble, there are a couple ways existing contracts and policies can be handled. First, the company goes through a rehabilitation. The insurance commissioner of that particular state would initiate this process. Every effort is made to help the company become financially sound again. If “rehab” does not work, the company will be liquidated. When there are not enough funds in the liquidation process to meet the company’s obligations, the state guarantee association steps in to protect up to the limits of that specific state. The state guarantee association raises the necessary funds from financially sound insurers that operate in the state. Their share will be based on the amount of premium they collect in that state. In this way, the state guarantee association acts as a re-insurer and allows the healthy insurance companies to bear the risk if one fails.

Financial strength ratings are like your insurance company‘s report card. They help you measure financial performance, including factors such as credit worthiness, asset-management, return on investment, profitability and future financial growth forecast. At Hoover Financial Advisors, we work only with companies whose financials are exceptional.

We do this by focusing on Comdex Ranking, a composite score averaging the ratings of various organizations given to the major insurance companies including A.M. Best, Fitch, Moody’s and S&P. The Comdex rating is on the number scale of 1 to 100 with a higher number being the better ranking. If an insurance company’s Comdex rating is 90, this means it scores higher than 90% of all of the insurance companies.  

Feel free to reach out to us with any questions surrounding the financial strength of your annuity or insurance carrier or for a complimentary insurance review.