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 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 >>
  2. 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 >>
  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. 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 >>
  5. What are examples of the largest companies in the insurance sector?

    Read about some of the largest and most influential companies in the insurance sector, a list that includes Berkshire Hathaway ... Read Answer >>
Related Articles
  1. Insurance

    What If Your Long-term Care Insurance Carrier Goes Bust

    When a long-term care insurance carrier goes bust, what happens to policyholders?
  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

    How To Invest In Insurance Companies

    Knowing the special circumstances that insurance companies operate under helps in evaluating whether or not a listed insurance company is a good investment and whether the economic environment ...
  4. 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.
  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. Financial Advisor

    Buying a Life Insurance Policy? Read This First

    Knowing who needs life insurance, how it works and the different types of insurance can help consumers make informed decisions about this product.
  7. Insurance

    The History Of Insurance In America

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

    A protection against the loss of income that would result if ...
  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. Current Assets

    A balance sheet account that represents the value of all assets that can reasonably expected to be converted into cash within ...
  2. Tax Liability

    The total amount of tax that an entity is legally obligated to pay to an authority as the result of the occurrence of a taxable ...
  3. Preferred Stock

    A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares ...
  4. Net Profit Margin

    Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage ...
  5. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  6. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
Trading Center