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What should I do if my insurance company goes bankrupt?

Jill Overmyer

Hearing that your home, health or life insurance company has gone bankrupt can be stressful. Even though the rate of closure among insurance companies is relatively low, policyholders across the country are affected by them every year. Fortunately, provisions do exist in most states to minimize your losses in the event that your insurance provider goes under.

Each state has a state insurance regulator. These regulatory agencies supervise insurance companies to ensure policyholders are protected if their providers run into financial difficulty.

If a company does fall on hard times and the state insurance commissioner declares it insolvent, or unable to pay all of its claims, the state then orders the liquidation of the company’s assets by state courts, according to the National Organization of Life and Health Guaranty Associations (NOLGHA). These assets then are converted into cash and given to the creditors to whom the defunct company was indebted, and also to the policyholders who would otherwise have lost their benefits.

Who will pay my claim?

If the company’s liquidated assets aren’t enough to cover all policyholders’ claims, the state’s “guaranty associations” come into play. Guaranty associations are state-run entities. All insurance companies doing business in a particular state must pay into its guaranty association. If a company goes out of businesses, these associations step in to pay claims.

Each state has a guaranteed maximum that’s payable to policyholders whose providers have been liquidated. According to NOLGHA, the maximum payouts for life and health insurance in most states are:

  • Life insurance death benefits: $300,000. Connecticut, New Jersey, Utah and Washington are considerably higher at $500,000.
  • Cash surrender/withdrawal value for life insurance: $100,000. Arkansas and North Carolina offer $300,000, and Connecticut and Washington are considerably higher at $500,000.
  • Withdrawal and cash values for annuities: $100,000. Caps for Arkansas and North Carolina residents are set at $300,000; the limits in Connecticut and Washington are $500,000.
  • Health insurance policy benefits: $100,000. This is raised to $300,000 in Arkansas and North Carolina, and to $500,000 in Connecticut and Washington.

Property insurance guaranty funds work in much the same way. According to the National Conference of Insurance Guaranty Funds (NCIGF), which supports property and casualty guaranty funds in all 50 states, the caps for home insurance are the amount spelled out in the policy or $300,000, whichever is smaller.

What should I do next?

In most cases, if your insurance company is declared insolvent, you will be informed by mail about how to proceed, according to The Texas Property and Casualty Insurance Guaranty Association. You also should seek a new insurance policy quickly, as most are cancelled within 30 days of an insurance company’s liquidation.

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