What Happens If Your Insurance Company Files Bankruptcy?

Insurance companies go through a rehab process that helps protect you

Studio shot of pencil erasing the word bankruptcy from piece of paper.
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As a policy owner of a life insurance, annuity, long-term care, or disability policy, it is natural to be concerned about what would happen to your benefits if your insurance company goes bankrupt. It may not be as bad as you think.

Rehabilitation Prior to Bankruptcy

Prior to an insurance company bankruptcy, the insurance company will go through a process called rehabilitation dictated by the laws of the state whereby the state insurance commission will make every attempt to help the company regain its financial footing.

If it is determined that the company cannot be rehabilitated then the company is declared insolvent, or bankrupt, and the court orders the liquidation of the company.

Guaranty Association

When an insurance company goes through bankruptcy insurance coverage will continue and policy claims will be covered and paid by state insurance guaranty associations, subject to each state's coverage limits. Guaranteed coverage amounts typically vary from $100,000 to $500,000 in benefits, but you will need to check with your state insurance guaranty association to see what amounts are covered for which types of benefits in your state.

There are both general and state-specific laws that must be followed. You can get additional information from the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA), which provides a summary of each state's laws and link to the state's guaranty association.

Check an Insurance Company's Rating

You can check on the ratings of your insurance company at any time. In terms of ratings, the three main companies that keep tabs on the insurance carriers are:

Each of the companies offers a rating system that clearly defines which companies have more risk than others. Generally speaking, A++, AAA, and Aaa are the superior scores, respectively, while D, CC, and Ca are the lower end of the spectrum, indicative of the weakest or poorest ratings. Strong ratings mean the company is considered to be financially stable. 

Be careful: each company uses a slightly different methodology in its ratings calculations. There's no guarantee that if a company receives the highest rating that your money is safe. There are plenty of instances when one of these ratings companies gave a company a high rating that proved to be wrong. Enron is a prime example.

Maybe the most useful indicator of your policy or carrier is whether or not it has received any recent downgrades. When you are meeting with your agent or adviser, ask what the current rating is. Compare this rating to where it originally began.

The ratings you hope to not hear include A.M. Best ratings called E, F, or S. This would mean the company is under state supervision or in liquidation or carries a suspended rating (which indicates information is not available).

For Standard and Poor's ratings, you would be concerned if the rating had changed to R. The R tells you that the carrier is under the supervision of insurance negotiators.

Lastly, if Moody's has issued a Ca or C rating, it means the carrier is extremely risky or in default. A company rated this low offers poor financial security, the opposite of what you want to see. To use the Moody's website, you will need to register to get free access by creating a username and password.

Your insurance agent should be accessible and can help you assess company ratings and policy needs.

A financial planner can also help you learn how to spread the risk out over several carriers (something you might do if you were buying an annuity) so that your future retirement income is not dependent on only the guarantees of one insurance company.

Be Cautious, but Don't Worry

It's quite rare for insurance companies to fail. Often, instead of going out of business, they find a buyer and its policyholders only experience the headache of re-enrolling with the new company. Signing with a highly rated company is certainly best, and it makes sense to keep up with the health of the company—but more than likely, your policy is safe.