What if an Insurance Company Declares Bankruptcy?
Life insurance policies are deemed as essential. Significantly, the money obtained through it will be beneficial for the loved ones left behind by a policyholder after his death or illness.
Life insurance policies pay for the taxes and debt of a policyholder. He or she may leave behind taxes or debts which need to be settled. Thus, life insurance benefits can provide payment in order to settle such obligations. Another, life insurance policies can cover the medical and funeral expenses incurred by the family for the policyholder. Also, it can fund particular financial goals of the family or loved ones left behind. These goals may include funds for college education of one’s child or children, home purchase, or even for a business capital. Lastly, it provides income for the family while it is at an adjustment stage of a loss. When the breadwinner of the family dies, it creates a huge impact on the finances of the family left behind. It is very likely that family income will diminish, and even experience a standard of living which is lower. As such, life insurance policies make it sure that the family has enough money coming in at regular intervals of the year in order to survive and address their financial needs.
Presently, there is a diverse number of life insurance companies which help individuals and family come up with income after an individual or client’s death, or illness. With their help, they are able to ensure that the family left behind will be able to survive, and at the very least, aide them in their adjustment after a loss.
An individual can choose from these varied life insurance companies. These can offer unique and staple benefits for the family and policyholder. However, what if a certain life insurance company goes bankrupt? What will happen to those insured? Will they be able to reap the benefits of the insurance policy which they availed?
If a leading insurance company declares bankruptcy, the policyholder will be protected by the state’s guaranty funds. All stated have at the very least two or three guaranty funds. One fund takes care of both life insurance and health claims, the other on claims for property and casualty. These kinds of fund function just like the FDIC or the Federal Deposit Insurance Corporation, which was established after the failure of banks after the Great Depression. These kinds of regulations protect consumers in an untimely failure of financial institutions.
It is also very unlikely that an insurance company’s failure would also mean failure to pay the claims of its policyholders. First and foremost, the states require that companies which focus on giving out insurance policies to be solvent. This means that insurance companies must have enough cash to pay out the claims of its policyholders. Another thing, if insolvency happens, the guaranty association takes over. This means that claims may be delayed or limited, but not entirely abandoned. Also, it is a common thing that if the failed insurer’s business is given out or transferred to another insurer or life insurance company which is more stable. Lastly, if a policyholder does not have any pending claims, the best thing to do is to look for coverage in other insurance company, in the event that one’s current insurer gets bankrupt. One does not have any obligation to continue making payments for the insurance of a certain insurance company. And one is in a good position to leave if one does not have any outstanding claims.