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. Can your insurance company cancel your policy without notice?

    Learn about your rights as an insured when it comes to your insurance policy being canceled, including how to access your ... Read Answer >>
  2. What is the average return on total revenue for the insurance sector?

    Learn about the three main segments of the insurance industry, and find out what the average return on revenues is for the ... Read Answer >>
  3. How do I choose which insurance company to use?

    Picking an insurance company to use is not an easy task, considering the financial crisis of 2008 and 2009. Several financial ... Read Answer >>
  4. Who are the best-rated life insurance companies in the US?

    Learn about what makes an insurance company the best. Read about the best life insurance companies in the U.S. in 2014, following ... Read Answer >>
  5. What is the difference between the death benefit and cash value of an insurance policy?

    Understand the difference between the various components of a life insurance policy including the death benefit and a policy's ... Read Answer >>
  6. What are some examples of when insurance bundling is a bad idea?

    Learn about situations where insurance bundling may not be a favorable option. Bundling insurance is often a good idea, but ... Read Answer >>
Related Articles
  1. Financial Advisor

    State Guarantee Associations: The Payer of Last Resort

    What's covered and what happens if your insurance company is in financial trouble and can't pay your claim?
  2. Insurance

    What Happens If Your Insurance Company Goes Bankrupt?

    When insurance companies go bankrupt or face financial difficulty, it's bad news for policy holders.
  3. Insurance

    Bundle Your Insurance For Big Savings

    Bundling your insurance can save you money and time. Read on to see how get the most out of multiline insurance discounts.
  4. Insurance

    Are You Protected If Your Insurance Company Goes Belly-Up?

    Consumer protection against insurance company failures actually falls into the hands of state governments. How much protection do you have?
  5. Financial Advisor

    Getting Life Insurance in Your 20s Pays Off

    Find out how Americans in their 20s can benefit from a well-thought-out life insurance policy, especially if they are able to build cash value for retirement.
  6. Insurance

    The History Of Insurance In America

    Insurance was a latecomer to the American landscape, largely due to the country's unknown risks.
  7. Financial Advisor

    Is Life Insurance From Your Employer Enough?

    Covering the needs of the ones you would leave behind is not easy. But efforts to secure a life insurance policy outside of work should pay off.
  8. Financial Advisor

    Mutual Vs. Publically Traded Insurance Companies

    Should you buy your insurance policy from a mutual or publically traded insurance company?
  9. Insurance

    Exploring Advanced Insurance Contract Fundamentals

    Understanding your contract can help you protect our family's financial security.
  10. Insurance

    Understanding Your Insurance Contract

    Learn how to read one of the most important documents you own.
RELATED TERMS
  1. State Guaranty Fund

    A fund administered by a U.S. state to protect policy holders ...
  2. Insurance Premium

    The amount of money that an individual or business must pay for ...
  3. Insurance Guaranty Association

    An organization that protects policyholders and claimants in ...
  4. Bureau Rate

    A standard price per unit of insurance set by a state's insurance ...
  5. Variable Life Insurance Policy

    A form of permanent life insurance, Variable life insurance provides ...
  6. National Organization Of Life And Health Insurance Guaranty Associations - NOLHGA

    NOLHGA is a voluntary organization of U.S. life- and health-insurance ...
Hot Definitions
  1. IRS Publication 970

    A document published by the Internal Revenue Service (IRS) that provides information on tax benefits available to students ...
  2. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  3. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  4. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  5. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  6. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
Trading Center