What happens if my life insurance company goes bankrupt?

Insurance company bankruptcies are rare because of the multiple safeguards in place to prevent them. However, when they happen, customers often have many questions.

What will happen to their life insurance policies? Do they need to shop for new permanent or term life insurance quotes? Generally, life insurance companies that go bankrupt get taken over by another company or the state.

You can choose to remain with the new company that takes over your bankrupt insurance company, or you can shop around for a new policy. Read on to learn more about what happens in the unfortunate event your life insurance company goes bankrupt.

What happens if your life insurance company goes bankrupt? 

If your life insurance company is going under, it’s not a cause for panic. The state guaranty association and the fund will take over and determine what happens to the insurance company.

We’ve outlined the possible outcomes below to inform you about what will happen to your insurance company.

Life Insurance Company Gets Taken Over by Another Company 

In most cases, the bankrupt life insurance company will transfer to another, larger company. The new insurance company will take over all the policies of the old company.

Generally, you’ll continue paying for your policies as usual. Also, the new insurance company will inform you if they make any critical changes, such as an updated insurance portal to make payments or any coverage updates.

Life Insurance Company Gets Taken Over by the State 

If the state guaranty association doesn’t immediately transfer the policies to another insurance company, it will maintain them until it finds a permanent solution.

The state may try to rescue the bankrupt insurance company before transferring policies to another company. Either way, the state will protect your life insurance policy, so you don’t lose coverage. 

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What safeguards are in place to prevent insurance company bankruptcy? 

Several safeguards are in place to prevent an insurance company from going bankrupt, so it’s rare for insurance companies to collapse. These safeguards include:

• Cash reserves. All states require life insurance companies to carry cash reserves. If an emergency should happen, the life insurance company should be able to pay out death benefits without going bankrupt.
• Reinsurance. Insurance companies with policies worth more than 10% of their net worth must get reinsurance. Reinsurance helps them pay out claims if there is a rise in death benefit payouts.
• Guaranty associations. All life insurance companies must join guaranty associations in their state. Guaranty associations will help if an insurance company goes bankrupt.

With all these safeguards, it’s unlikely that your insurance company will go bankrupt. However, if they do, the state will still protect you.

What to Do When Your Life Insurance Company Goes Bankrupt 

When a liquidated life insurance company goes bankrupt, you have two options. You can choose to stay with whatever new company takes over the liquidated insurance company if the new company offers the same coverages and benefits at the same cost, or you can shop for a new policy.

If your rates and coverage stay the same, staying with the new company may be worthwhile. However, if you feel more comfortable with a life insurance company of your choosing, you may wish to shop around and get a new permanent life or term life insurance policy.

How can I avoid choosing a company that may go out of business? 

You should always look at a company’s financial ratings to avoid a potentially bankrupt life insurance company. If the life insurance company has strong financial ratings, it’s unlikely to go bankrupt soon. 

However, if a company has poor financial ratings or performance, it’s best to avoid that company. Some rating agencies you can check for financial ratings include A.M. Best, Moody’s, and Standard & Poor’s. These three companies give an in-depth look into a company’s financial health.

In addition to financial ratings, you should also consider the customer reviews of a company, its rates, and policy offerings. These factors will help you decide if a company is right for you.

The Final Word on Bankrupt Life Insurance Companies 

It’s rare for a life insurance company to go bankrupt, but rest assured that if your life insurance company goes bankrupt, there are multiple safeguards to protect consumers. Generally, the state will step in with intervention strategies to deal with the company to ensure policies get handled correctly.

Use our free rate comparison tool if you’re worried your life insurance company may go bankrupt and want to shop around for a new insurance company. It will help you find your area’s most affordable life insurance policies. 

 

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