Insurance is great financial product to spend money on. In an ideal situation you have insurance on your car, your home, your life, your health, and over your risk of disability. You are wise to invest money in these products, but you also put yourself in a dependent situation. You are planning your financial life with the assumption that in the unfortunate instance that you need to file a claim with your insurer, that they will be able to pay out your claim.
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Unfortunately, insurance companies are just like any other business in a competitive environment. Market forces, poor decisions, or natural disasters that result in an unexpectedly high number of claims can put an insurance company out of business. What happens to all of your premiums and policies if your insurer goes bankrupt?
Every state has an agency that regulates the insurance industry within the state — for example, here is the Virginia Insurance Guaranty Association. These agencies also maintain guaranty funds that, if needed, guarantee the insurance policies of customers of insurance companies that go under. These agencies act in a similar fashion to the Federal Deposit Insurance Corporation that regulates banks across the United States. If an insurer is likely to go under, the regulatory agency steps in and takes control of the company. The goal is to do everything possible to keep the insurer going, but if that is not possible the agency smooths out the process of the company shutting down just like the FDIC does when a bank fails.
If your insurer fails, you will need to call your specific state’s guaranty hotline to determine how to proceed. Your insurance policies will generally be honored up to a certain point, usually to the next renewal period. This is to prevent you from instantly losing insurance; you have time to research your next insurance company.
Unless you are instructed by a state regulator to not make payments, you must continue to make payments as you would if the company wasn’t under regulatory control. A failure to make payments on time can result in your policy being canceled. If you are told to not make payments, verify the information and make sure you get the individual’s information who told you not to pay. You want to have solid documentation in case it turns out you did need to pay.
If you need to file a claim you will be dealing with the state guaranty fund or agency instead of the insurance company. Unlike the insurance company, the state isn’t in business to take claims and won’t have millions of dollars to pay out to a wide range of customers. Due to limited funding, these guaranty funds limit how much can be paid out for specific types of claims and also in total to one person. In short, if there are many others in the same situation as you, the amount of funding available to pay out claims is limited, so you need to move quickly.
Exactly how much your state’s guaranty fund will pay out depends on where you live. Most states provide a maximum of $100,000 in cash value for life insurance policies, $100,000 for annuities, and $300,000 in maximum death benefit.
If you are concerned about your insurance company going bankrupt, you are probably with the wrong company. There are numerous insurance companies in the marketplace that would love to have your policy and premium payments. You can look up the credit ratings of your insurance company. Those with poor credit ratings are seen as higher risk to bondholders, which means they are more likely to default if the bondholder lends the company money.
Getting a cheap insurance rate is great, but it doesn’t do you any good if the company goes under. Sometimes a cheap rate is a good deal, and sometimes it is the sign of a desperate company looking for a rush of premiums to keep them afloat. Do your research before you sign up to determine whether your great insurance rate quote is really a good deal or not.