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A bad bank is causing you problems? You’re covered by the Federal Deposit Insurance Corporation (FDIC). Have you ever lost a brokerage account? You are at least partially protected by the Securities Investor Protection Corporation (SIPC). Does your insurer go bankrupt? No worries. Your coverage will continue.
Despite the federal takeover of AIG in September 2008, many people are surprised to learn that the role of protect insurance companies failures actually falls to state governments. Insurers licensed to conduct business in their respective states are regulated by state insurance regulators. Here’s what you need to know about your life insurance policy.
Key Takeaways
- Banks and brokerage firms are protected by the federal government in the event that they fail, but life insurance companies are not protected.
- Life insurance policyholders are protected in case of a life insurance company going out of business by state governments-specifically, state insurance regulators who monitor the financial health of life insurance companies.
- As a first step, state regulators will attempt to transfer an insurance policy to a more stable fund if an insurance fund fails. The policy will instead be maintained through the state’s central guarantee fund if that is not possible.
- By reinsurance, a life insurance company’s bankruptcy risk can be reduced.
What Happens When a Life Insurance Company Fails?
protect insurance companies
Bankruptcies and failures are rare. Since the 2008 financial crisis, no life insurance companies have declared bankruptcy, according to the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA).
If a failure or bankruptcy does occur, then consumers are protected by safeguards. They include:
- Reserves statuaries
- Reinsurance
- Guaranty association membership
State law requires life insurance companies to maintain capital reserves to cover payouts to policyholders in the event of business failure. Depending on the state, the amount that must be held back can vary, but these reserves, along with other assets of the company, can be used if the company goes bankrupt.
Insurance companies use reinsurance to reduce the risk of potential losses in the event of a business failure. By purchasing insurance policies from other insurers, life insurance companies spread out the risk. As a result, if one company goes bankrupt, the other companies can step in to ensure that any claims or death benefits are paid out.
The NOLHGA is another type of protection against losses. Members’ associations can guarantee payment of benefits if a member’s life insurance company goes out of business. According to state law, an association’s payment may be capped at a certain amount, and membership is usually required.
Note
You may need to seek financial remedies through reserves or reassurance before a guaranty association will pay benefits if your life insurance company fails.
Variable Annuities May Not Be Covered
The process of determining if you have life insurance and how much coverage your state provides is fairly straightforward. Annuities, however, are a bit more complicated.
An annuity is a contract in which you make payments to a company with the understanding that it will return payments to you at a later date. Variable annuities are based on the performance of underlying investments to determine their rate of return.
To determine if you are protected, it is important to review your annuity contract and read the fine print provided by your state. Variable annuity policies aren’t covered in Florida, for example, unless some aspect of the policy is guaranteed by the insurer. This indicates that some kind of liability associated with the policy is being covered by the insurance company. If there is no liability, the insurance company cannot assist you.
You can find information about coverage in your state by going to the NOLHGA website. Click the link for your state’s association once you are on that website. Contact your state’s association directly if you don’t fully understand what’s covered.
Advice
In retirement, annuities can generate an additional income stream; however, if you want a guaranteed return, then you should consider a fixed versus a variable option.
Maximizing Your Protection Coverage
In order to increase the size of your state guaranty fund security blanket, you must work within the limits of your state’s law. Doing business with multiple insurers is an effective way to increase your coverage in the majority of states. If you have two policies with two different companies, then you will receive double the coverage in most states.
Using multiple insurance companies as a layer of coverage is similar to opening bank accounts with multiple banks to maximize FDIC protection. However, given the large face amounts involved with life insurance and the underwriting hassles that would be involved in getting multiple life insurance policies through different insurance companies, it isn’t practical in the real world and could end up costing you more money for the same amount of coverage.
You can also increase your state coverage limits by partnering with multiple annuity companies. In most states, your spouse will receive duplicate coverage if they own an annuity even if it’s not practical for life insurance. You and your spouse could invest with the same company if you intend to invest $200,000 in an annuity and your state’s guarantee is $100,000 per individual.
Important
You should carefully review the fees associated with annuities if you’re considering expanding your coverage, including surrender charges, early withdrawal charges, and administrative charges.
Where Can You Find Good protect insurance companies ?
By selecting the right life insurance company, you can minimize the need for these protections. You need a licensed insurer that’s financially sound and can pay out claims and death benefits in the foreseeable future.
For finding the best life insurance companies, you can use some useful tools. The first is AM Best, which rates life insurance, annuities, and other financial products. Letter grades are used to assign AM Best ratings, similar to how report cards work. Insurers with an A+ or A++ rating, for example, have excellent financial health, while those with a D rating are not likely to be able to pay out claims if they fall into financial difficulty.
Review other industry ratings, such as those issued by S&P Global or Moody’s, to gain a better understanding of the financial strength and weaknesses of a life insurance company. If the company’s annual report or quarterly earnings report is made public, you can also check out the company’s financials. Using these reports, you can learn about a company’s assets, liabilities, and earnings.
You can also read online reviews from established websites, consumer reviews, and Better Business Bureau ratings. By combining these tools, you can narrow down the list of life insurance companies that interest you.
Advice
To find the right life insurance option for your needs and budget, consider the life insurance company’s range of products and what you will pay for insurance.
The Bottom Line
When you’re counting on your life insurance policy to pay out a death benefit to your loved ones later, the idea of losing money on it isn’t all that appealing. There are safeguards in place, but they are not always foolproof. You should review an insurer’s ratings and financial strength when deciding where to purchase life insurance or an annuity.
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