What happens to insurance policies and variable annuities if the insurance company itself goes bankrupt - do the policyholders get anything out of it?

By Chizoba Morah AAA
A:

The idea of an insurance failing or going bankrupt is one that can be very frightening. However, when an insurance company is in financial peril, there are state guaranty associations and state-run funds that help pay the claims from policies if the insurance companies go bankrupt. All 50 states, the District of Columbia and Puerto Rico have these associations and together they form the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA). As the name suggests, these associations only cover life and health insurance.

When an insurance company reports to its state insurance department that it is in financial trouble, the company goes through a rehabilitation period. During the rehabilitation period, the state does whatever it can to help the company recover financially. If it is determined that the company cannot be saved, then the company will be liquidated. Once the liquidation of the company is ordered, the state's guaranty association begins to pay out claims to the policyholders of that company. There are general and state-specific laws that guide guaranty associations. Some of the general rules include payout limits such as $300,000 for life insurance death benefits, $100,000 in cash surrender or withdrawal value for life insurance, $100,000 in withdrawal and cash values for annuities, and $100,000 in health insurance policy benefits. To find out more about guaranty associations and state specific laws that guide them, go to www.nolhga.com .

To learn more, check out The Industry Handbook: The Insurance Industry.

This question was answered by Chizoba Morah.

RELATED FAQS

  1. What are the tax implications of a life insurance policy loan?

    Learn the instances in which you are required to pay taxes on a life insurance policy loan, so you can avoid making a costly ...
  2. What is a collateral assignment of life insurance?

    Learn about collateral assignment of life insurance so you can make a wise decision about what kind of collateral to use ...
  3. How does the grace period work on my Flexible Spending Account (FSA)?

    Learn how the grace period works on a flexible spending account so you can take full advantage of your annual pretax contributions.
  4. What are the pros and cons of life insurance policy loans?

    Find out the pros and cons of borrowing against your life insurance policy to help you decide if this loan type is the right ...
RELATED TERMS
  1. Disease Management Program

    Disease management programs can help control health care expenses ...
  2. Re-Entry Term Insurance

    A type of term life insurance contract that offers low rates ...
  3. Hazardous Activity

    If one of your hobbies falls under an insurance company’s definition ...
  4. Out-of-Pocket Limit

    Out of Pocket Limit
  5. Surrender Period

    The amount of time an investor must wait until he or she can ...
  6. Least Expensive Alternative Treatment (LEAT)

    A clause in an insurance policy that indicates that the insurer ...
Related Articles
  1. Health Open Enrollment: Read This Before ...
    Insurance

    Health Open Enrollment: Read This Before ...

  2. 5 Ways To Ace 2015's Health Insurance ...
    Insurance

    5 Ways To Ace 2015's Health Insurance ...

  3. 'Donut Hole' Essentials For The Financial ...
    Investing Basics

    'Donut Hole' Essentials For The Financial ...

  4. Tips To Beat Inflation For Near-Retireees
    Investing News

    Tips To Beat Inflation For Near-Retireees

  5. Is Burial Insurance A Ripoff?
    Insurance

    Is Burial Insurance A Ripoff?

Trading Center