Insurance was created for those times when something bad happens to you. But what if the “something bad” happens to your insurance company instead? Specifically, what if your long-term care (LTC) insurance carrier goes out of business? 

Possibly the best-known case involves Penn Treaty, a company based in Pennsylvania that wrote about 100,000 long-term care insurance policies. In 2009, the company was placed under rehabilitation by then-Pennsylvania insurance commissioner Joel Ario. 

Soon after, Ario petitioned the court to liquidate Penn Treaty and its sister company, American Network Insurance Co. The state lost, and later lost its appeal for liquidation, but after years of trying to rehabilitate the company, the two insurers finally agreed to liquidation this year. 

The Bigger Problem

In the 1990s, long-term care insurance became the next potential insurance gold mine. What aging middle-class American wouldn’t want the peace of mind of knowing that a significant portion of his or her medical care would be covered?

But that peace of mind didn't last. Because the policies were new, the insurers charged with predicting their future gain badly miscalculated. People were holding policies longer than expected and premiums weren’t enough to keep the insurance companies solvent.

Companies had no other choice but to significantly increase the price of the premiums on these policies, sometimes by double-digit percentages. States often allowed these increases at the cost of elderly policyholders

In the case of Penn Treaty, Pennsylvania insurance regulators estimated that it would take premium increases of up to 300% to keep the company solvent. That’s why the company eventually failed. 

What Happens to Policies When a Company Goes Under?

As of this year, Penn Treaty had 79,000 active policies. Does that mean that all those policyholders are left high and dry? Luckily, the answer is no, but there are some conditions.

Much like your bank accounts are protected by the Federal Deposit Insurance Corporation (FDIC), your insurance policies have protection as well; it’s called a guaranty.

The National Organization of Life & Health Insurance Guaranty Associations is an organization made up of the guaranty associations of all 50 states and the District of Columbia. It exists to allow coordination of efforts among all states, but each state has its own organization with differing laws. 

If an insurance company becomes insolvent or goes out of business, the guaranty organization will step in and continue paying on the policies. But much like the FDIC, there’s a limit determined by each state. Each guaranty organization will pay out a maximum of $100,000 to $500,000 per policy, with most paying $300,000. 

That means that even if you qualify for higher payouts, your maximum is based on the state guideline.

In most cases, however, struggling insurance companies are purchased by other insurance companies. When a company is purchased, all policies remain in force without modification. In most cases, you won’t see any difference other than the name change.

What Should a Policyholder Do?

If you hear that your insurance company is having financial difficulties, don’t run away – especially with long-term care insurance. When you took out the policy, you were likely younger, possibly healthier, and rates were lower across the industry. If you cancel the policy now, your rates will likely be much higher.

Second, don’t stop making payments. If you miss payments, the carrier might be able to cancel your policy.

Finally, research any insurance company before you purchase a policy. A.M. Best, Fitch, Moody’s and Standard & Poor’s rate the financial health of insurance companies. You can also find plenty of reviews online. Don’t take the insurance company’s word for it – research its fiscal standing on your own.

The Bottom Line

The Penn Treaty case is extremely rare. Rest assured that if you have a policy, nearly without fail and regardless of what happens to the insurance company, your policy probably isn’t in danger. That doesn’t mean you shouldn’t pay attention to the health of your insurance companies – just don’t panic (or stop paying) if you hear bad news. (See also: How the Long-Term Care Insurance World Is Changing and How to Choose the Best Long-term Care Insurance.)


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