The American free enterprise system has proven to be the most resilient and efficient means of getting consumers the goods and services that they want. But—as we have all learned—free markets aren’t ever risk-free. Even well-established companies can fail during an economic downturn, or even when the business climate looks favorable.
Insurance companies are no exception to this rule.
An insurance company may be forced into bankruptcy when its debts outstrip its assets, just as any other business. However, the collapse of a life insurance firm can inflict disastrous harm to a community, or even to a whole state. People use their life insurance accounts as investments or as cushions for end-of-life expenses, so when an insurer goes out of business, policyholders are faced with potential financial ruin.
State governments step into the breach
Bear in mind that no federal agency is in charge of regulating the life insurance industry. Each state sets its own standards for licensing agents and the minimum requirements of all insurance policies offered for sale within the state borders.
Early on, state governments recognized that life insurance was too important to their citizens to be left purely to market forces. Each state—plus the District of Columbia and Puerto Rico—has created a life insurance guaranty association. In many states, this association will also cover health insurance too (learn more about not for profit health funds). When an insurance company is facing severe financial difficulties, the state association will move in to assess the situation and provide financial guidance to keep the company afloat.
If it’s not possible to restore financial stability, the guaranty association will work swiftly to close the insurance company. The association will pay off outstanding claims and reimburse policyholders for the premiums they have paid.
How can the state association afford to do this? Essentially, the association acts as an insurer for insurance companies. Every insurance company operating in the state is required to pay the association an annual fee; those funds are used to pay off claims after life insurance company bankruptcies. Since 1983, state insurance guaranty associations have paid out more than $5 billion to policyholders after their insurance companies became insolvent.
The limits to generosity
Of course, state agencies will not hand over money to everyone who might claim a bankrupt life insurance carrier owes him benefits. Although the precise rules will vary from state to state, most insurance guaranty associations follow these generally accepted rules:
- Coverage is extended only to life insurance firms that are licensed to operate in the state. If you are dealing with an unlicensed life insurer, you assume all the risk from a bankruptcy. Your state insurance commissioner or equivalent official publishes an annual list of all licensed insurance companies.
- In most states, there is a cap on the maximum amount you can claim from a life insurance policy canceled due to insurer bankruptcy. The amount is typically $300,000 maximum for lost death benefits and $100,000 maximum for lost cash value of the policy. Those maximum amounts are given per insured individual, not per policy. If someone is covered by multiple life insurance policies that add up to more than $300,000, for example, the insurance guaranty association will still only pay the maximum $300,000 benefit and any excess value is lost.
- Only life insurance policies that are up-to-date on premium payments will be eligible for reimbursement.
Do you need a life insurance attorney to expedite your claim?
Certainly after your life insurance carrier files for bankruptcy, your state insurance guaranty association should move quickly to ease the worries of policyholders and beneficiaries. And yet it always seems some people fall through the cracks. Some people have to deal with lost paperwork, unverifiable policy numbers, or delayed life insurance claims.
If you have an interest in a life insurance policy (either as policyholder or beneficiary) that has been complicated by the insolvency of the issuing insurance company, seek legal advice immediately from Life Insurance Law at (215) 523-6900. Our network of life insurance benefit attorneys extends nationwide. We can work hand-in-hand with your state’s life insurance guaranty association to make sure you are fully compensated for your life insurance investment. If your settlement is unreasonably delayed, we’re not timid about going to court to demand the money you deserve. And, in every case, we never charge you a legal fee unless we can get you a financial recovery.
Call today to have your questions answered and your mind put at ease.