The idea of an insurance company in financial peril is one that can be very frightening. However, there are state guaranty associations and state-run funds that help pay the claims from policies if an he 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, it 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 company's policyholders.
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.