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Are You Protected from Insurance Company Bankruptcy?

Across the national plain, there’s plenty of protections in place for banks and brokerage accounts with the FDIC and SIPC, but what happens when your life insurance company walks the plank to “swim with the fishes”?  What protections are in place?

As of yet, there aren’t any federal protections in place, but there are state-wide protection plans.  For the time being, consumer protection against insurance company bankruptcy is handled entirely by the state in which you acquired your policy from.

Each state, in fact, has their own regulation system in place; each staffed with regulators whose sole job is monitor, analyze, and troubleshoot the financial standing of the licensed insurance companies doing business within their state.  When these regulators see that an insurance company is for the shredder financially, they step in and pull the plug before they can cause any more financial damage that the state will be required to clean up.  You can check out the GIO life insurance help section directly on their website to find out more about your own needs.

How does the state clean it up?  With the state’s guarantee fund – a fund that exists to protect policyholders.

How the Guarantee Fund Works

As soon as an insurance company flops and heads straight for liquidation – do not pass go, do not collect $200 – the guarantee fund kicks into gear.  First, the fund managers will try to ship your policy to another insurance company – preferably one that’s doing substantially better financially – to take over, but if there aren’t enough insurance companies to go around, or the amount of the policies is too much of a weight for them to bear, the weight of the policy falls to the central guarantee fund.

Of course, there’s still limitations on what the state guarantee fund can cover, and they vary from state to state.  For example, in Florida, these limitations for life insurance look something like this:

• Death Benefits: up to $300,000 per policy
• Cash Surrender: up to $100,000 per policy

What your state will cover is information that is open to the public, easily acquired, and very simple to understand – all you have to do is visit the Life & Health Insurance Guarantee Association’s website.  Find your state’s association within, call them directly if you have any questions, and go from there.

Now, it’s a little different if you have a variable annuity; what will be covered, and what won’t, is dictated by the contract that you signed.  For instance, in Florida, it needs to be written into the contract that the issuing insurer is liable and that the funds are guaranteed by them.  Insurance companies will only write this into annuity contracts if they’re being paid, by the state, to be made liable.  If they didn’t receive that liability insurance, then you won’t get anything when that company goes bankrupt!

What’s the Catch – It’s an Imperfect System

Unlike the FDIC – which requires banks to pay into a fund and basically supply their own safety net – states don’t have a pre-established fund and if it rains, it pours; should something go wrong, if there’s a chink in the armor, there isn’t much of a back-up plan.

Instead, when the state guarantee fund gets called upon, it then calls upon the rest of the licensed insurance companies in-state to divvy the losses according to what their market share is.  If a large enough insurance company should plummet to its death, that would be a huge weight dropped right onto the shoulders of other insurance companies who have been doing well – up until that moment.

And that moment is very unpredictable – who knows if at that moment the other insurance companies can take the weight of the blow.  If not, and the state has to step in, their solution will most likely involve the taxpayers, which never bodes well.