It is a dismal thought: you pay into a life insurance policy for years, or even decades, only to learn that your insurance company is insolvent. The fear is that you will be unable to secure insurance through another company and will be left to fend for yourself.
The good news is that, according to the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA), insurance companies that are in severe financial straits are taken over by the insurance department of the state in which they are headquartered. Should the unthinkable happen and your insurer go belly-up, you will receive notification from the State’s insurance department. As long as your continue to pay your regular premiums or cash value exists in the policy, your claims will continued to be covered. The guaranty association in the state that took over the policies will either pay claims directly to you or will transfer your policy to an insurance company that is financially solvent.
It is important to note that the guaranty association of each state spells out which types of policies they protect. In general, individual and group life and health policies are covered, as are individual annuity contracts that were issued by a member of the guaranty association. On the other hand, most states will not guaranty coverage for non-indemnity health plans, like HMOs.
According to Bankrate, the federal bankruptcy code makes it impossible for a failing insurance company to declare bankruptcy, thereby bypassing claims they are due to pay out. It is the bankruptcy code that set the standard for the highly structured programs run by each state and designed to protect citizens from a failing insurance company.
In more good news, Bankrate says that life insurers are among the best capitalized insurers in the market and highly unlikely to fail in the first place.