What should I do if my life insurance company goes bankrupt?

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Asked April 3, 2012

1 Answer

In recent years, it has become relatively common for banks and other financial institutions, including insurance companies, to run into financial difficulties or even become bankrupted. When this happens, it can be a worrisome problem for life insurance policyholders who suddenly discover that the policies they have been paying into for years are no longer viable. When this happens, your first course of action is with your state department of insurance.

In each state, insurance companies are overseen by government officials called insurance regulators. When an insurance regulator identifies a financial problem with an insurance company, they can demand that the company's assets be liquidated, which amounts to selling off the assets of the company to the highest bidders. The money received from these sales are then used to pay the debts of the company, including repaying money to policyholders who have been paying premiums on their policies in good faith. If the liquidated assets are not sufficient to pay off claims or return investments, then the case goes to another branch of the department of insurance, called a guaranty association.

Guaranty associations will pay off open claims of an insolvent insurance company. However, they will not return the premiums paid in by policyholders who have not filed claims. In most cases, a life insurance company that has been declared insolvent will notify policyholders, usually by mail, of the declaration and provide a date when the policy will no longer be valid.

If your policy is not bought by another company, and many are not, then you will lose the money you have paid into the policy and it will be imperative that you replace the policy as soon as possible. Most companies will only provide you a limited amount of notice before your policy is canceled, usually 30 days. If you are fortunate, and this is a rare occurrence, your new insurance company will honor the policy you already have and waive any waiting periods or other clauses that might delay a claim if one is made during the usual waiting period.

Answered April 3, 2012 by Anonymous

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