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What Happens If Your Life Insurance Issuer Goes Out Of Business?

What Happens If Your Life Insurance Issuer Goes Out Of Business?

During times of economic uncertainty consumers will refrain from spending which can lead to retail closings and economic stagnation. Businesses suffer both small and large and while bankruptcies can be prevalent in the retail sector certain financial institutions have protections in place. Banks and credit unions are protected by the Federal Deposit Insurance Corporation also known as the FDIC. The FDIC was created as part of the Banking Act of 1933 to help prevent consumer panic fearing that they would lose all their money should their bank collapse. Since the FDIC was created not a single depositor has lost a penny due to this protection. If this wasn't the case there would be a run on banks which could result in a bank becoming insolvent. While not a direct correlation, something similar happens if you're like life insurance issuer goes out of business.

Every state in the union has an insurance commission which guarantees life insurance policies should the underlying company go out of business. While it is rare for an insurance company to go out of business, if it does happen the most likely scenario is that another life insurance provider will purchase the existing policies from the failing company. A state insurance commission guarantee prevents a consumer panic and facilitates a smooth transition for individual life insurance policies ensuring continuity.

Just as the FDIC must be federally funded to ensure there are enough deposits on hand to cover a bank or credit union closure, state insurance commissions have a similar account called a guaranty fund. Instead of using taxpayer dollars to fund this account, life insurance companies are required to pay into the guaranty fund association as a condition of conducting business in a state. Because it is self-funded, consumers are always protected and life insurance claims are paid in full even when underwritten by insurance companies which have gone out of business. Life insurance companies benefit from the guaranty fund because the amount collected is based on an assessment of the company's finances which ensures equal distribution. They can also use the guaranty fund assessments as a tax write off.

Also similar to how the FDIC operates in terms of placing a ceiling on the amount of demand deposits which are protected for individual accounts, a guaranty fund may not be able to cover a million dollar life insurance policy. There are other limitations as well such as the types of policies covered so if this is a concern be sure to contact your state insurance commission to verify that your life insurance policy is protected. The fact that a life insurance company has folded does not eliminate the need to continue making monthly insurance premium payments. While responsibility for fulfilling life insurance contracts may have shifted from the company to the state, and in some cases to another company, the insured must still make monthly payments in order to keep the life insurance policy active.

While it is rare, it sometimes happens that your life insurer goes out of business, in which case the state insurance commission will contact all life insurance policyholders of the company and advise them of the situation. When notified, insured individuals will receive additional information informing them of what to do next and what their options consist of with regards to their policy. In reality not much happens if your life insurer goes out of business. Some paperwork gets shifted behind the scenes between the bankrupt company, the state insurance commission and a possible additional company which may buy the policies. Policy holders keep making their monthly premium payments and file away any notifications for your records.

Image by: Marius Watz