What Happens to Your Policy if a Life Insurance Company Goes Out of Business?

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What happens when a life insurance company goes bankrupt?

Considering the typical benefit is low six-figures to several million, it’s a scary proposition. No one wants to pay monthly premiums for decades only to have their cash vanish due to improper financial management by the insurer.

It’s relatively rare, but it does happen.

Fortunately, there are three safeguards in place for this type of scenario. And perhaps the greatest safeguard of all is to heed the stern advice of money expert Clark Howard when selecting a life insurance company.

But let’s look at what happens if your life insurance company implodes.

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What Happens if Your Life Insurance Company Goes Out of Business?

If your bank goes out of business, the Federal Deposit Insurance Corporation (FDIC) will protect the money in your account. And don’t worry! If you’re a credit union member, then the National Credit Union Administration (NCUA) will do the same for you. And for brokerage account holders, the Securities Investor Protection Corporation (SIPC) has you covered.

But what about life insurance companies?

You may remember the federal takeover of AIG in September 2008 during the financial crisis. But the onus for monitoring and regulating life insurance companies falls to the individual states.

State regulators monitor the financial health of companies licensed in their states. In case of failure, states will try to transfer your policy to a stable insurance fund or keep it active via the state’s guaranty fund (more on that shortly).

Here are the three ways that a life insurance beneficiary from a defunct insurer can still collect a claim.


1. Statutory Reserves

States require each insurance company that’s licensed in their state to maintain capital reserves. The amount varies by state. But if the company goes bankrupt, beneficiaries can get claims fulfilled via these reserves as well as any company assets.

2. Reinsurance

Life insurance companies buy insurance policies from other insurers to spread out their risk.

3. Guaranty Association Membership

All 50 states and Washington D.C. run these funds, along with Puerto Rico and the U.S. Virgin Islands.

State guaranty funds “act as a form of insurance for insurance and are funded by insurance companies that sell insurance in a given state,” according to Investopedia.

Depending on the state, a life insurance company can be required to pay between 1 and 2% of its net sales on life insurance policies to the guaranty funds.

If a member insurance company goes bankrupt, the fund steps in and guarantees payment. However, the amount of the payouts is capped by state law.

Also, you may need to work through any statutory reserves or reinsurance policies a defunct life insurance company holds before a guaranty association will step in.

Since its inception in 1983, the National Organization of Life & Health Insurance Guaranty Associations (NOLGHA) says it has paid out about $9.21 billion.

Clark’s Financial Health Rule for Picking a Life Insurance Company

Arguably the best way to avoid your life insurance company going out of business is to limit your policy search only to companies in excellent financial health.

Enter the widely used credit rating agency A.M. Best. Founded in 1899, it specializes in the insurance industry. A.M. Best issues ratings for each company based on “an independent opinion of an insurer’s financial strength and ability to meet its ongoing insurance policy and contractual obligations.”


When you buy term life insurance, Clark says to limit your search to companies with an A+ or A++ rating on A.M. Best.

Final Thoughts

Individual states regulate life insurance companies. This provides you with a few different layers of protection should your life insurance company go out of business.

If you follow Clark’s rule, however, and only buy life insurance from companies with an A.M. Best rating of at least A+, there’s a good chance you’ll never have to face this headache.

If you’re thinking about life insurance, you face perhaps an even more important choice: term life vs. whole life insurance.

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