What if my insurer goes bankrupt?

Whether you posses a life insurance, long term care, or disability policy perhaps you have asked yourself the following question. “What would happen to my policy if my insurer were to file for bankruptcy”? While this question encompasses a valid concern, you might be pleased to learn the answer.

Before a company goes completely under or files for bankruptcy a process called rehabilitation will first occur. This process is designed to help save insurers from going bankrupt and is led by each state’s insurance commission. The goal of this process is to help the company regain financial stability thus, help protect insurers as well as their policyholders. Given that the insurer cannot be salvaged the company will then file bankruptcy and the liquidation process will commence.

The bankruptcy process

It is important to note that while an insurance company undergoes bankruptcy insurance coverage and policy claims will still be paid for and accounted for by state insurance guaranty associations. While the amount of coverage will vary by each state coverage limits, approx. $100,000 to $500,000 in benefits can be allotted.

If you are still weary of a specific insurer you are considering filing for bankruptcy, here are some tips to help you make an informed decision. Each insurers rating can be very telling of the companies reliability and overall history. Three companies with ratings to consider for multiple insurers include:

  • A.M. Best
  • Standard & Poor’s
  • Moody’s

Accessing risk

The ratings assigned by these companies can help determine the reliability and risks of each individual insurance company. With higher ratings such as  A++, AAA, and Aaa signifying more reliability and lower rating such as  D, CC, and Ca signifying the opposite. Even so you should be aware that some ratings may use different parameters and additionally a high rating does not provide 100% security against bankruptcy. Due to this, another factor we can use to evaluate likeliness for bankruptcy would be to evaluate any recent downgrades. These downgrades refer to companies which previously had a higher rating than presently so, meaning their ratings have dropped or downgraded. Specific ratings to watch for would be E, F, or S as these can signal that a company is under state supervision or in liquidation. Additionally, companies with a  Ca or C rating are considered especially risky and should be thoroughly evaluated.

Rest assured that while bankruptcy is always a possibility for even the most firm standing companies, the occurrence of such in the insurance world is quite low. There are many other more favorable options such as finding a buyer which can help minimize the negative effects on current policyholders. The best way to make an informed decision upon which insurer when evaluating  for bankruptcy, would be to work with an informed insurance agent. The agent should possess knowledge of each carrier ratings and help assign risk and reliability for each. Finding an insurance company with a higher rating in conjunction with a skilled agent should help address many of your concerns.

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