What might happen if my insurance company fails?
Insurance companies are regulated at the state level by the insurance department in which the individual subsidiary is based. When an insurance company gets into trouble, the state regulator steps in and takes control of it.
If the regulator believes that the company has good assets and a strong book of business, the regulator will direct it to be rehabilitated. During rehabilitation, the company is restructured and attempts to build capital and clean up its operations, with the ultimate goal of being released from rehabilitation to operate on its own.
As part of that restructuring, the company may modify policy terms such as lowering guaranteed interest rates or increasing premiums. A court order would be required to do this where affected parties would have input.
If the company is in dire financial shape, the regulator will take it over and immediately begin liquidating its assets. The condition of the company and the reason for the regulatory takeover determine how the failed company and its policyholders will be handled.
What happens to policyholders is a case-by-case situation, but typically, insurance claims continue to be paid. If you hold a life insurance policy and you pass away, the death claim on the policy would usually be paid. If the policy has a cash value, which would be the case with a whole life or universal life policy, the outcome is less clear.
The receiver could, in that case, freeze the cash values and not release them until such time as the assets of the company are valued. At resolution, you could be made whole or receive only a portion of your cash value.
If you own a fixed annuity and you are in the payout phase, the payments would typically continue. What could potentially change is the interest rate that is credited to your initial investment. If the receiver, or a potential buyer, determines that the interest rate is too high, a court order could be issued to lower the crediting rate on that block of annuities.
If you own a variable annuity, it would be slightly different. The assets underlying your contract are separated out from the general assets of the insurance company, so there should be no question of the value of the contracts. Your payout would typically continue, and the value of your annuity would remain tied to the underlying assets.
That all said, being the policyholder of a failed insurance company can be unsettling and full of uncertainties and pitfalls. Thus, our recommendation is to seek to do business with Weiss Ratings recommended insurer (rated B+ or better) regardless of regulatory guarantees. This should give you two layers of protection — (1) the financial strength of the company on its own merits plus (2) state guaranty association coverage.