What if the Insurance Company is No Longer in Business?
What would happen if you find out one day that your insurance company is insolvent and is soon going to be out of business? Well, the fortunate thing is it’s not something you need to worry about. In almost every state, a “guarantee association” or “guaranty fund” exists.
Each state has its own fund insuring various amounts for death benefits, annuities and cash value for life insurance properties. Guaranty funds pay your claims up to a certain amount. For the average consumer’s insurance claim, that level of coverage will be sufficient enough.
All you need to remember is that your state’s guaranty fund will protect you. Each state has at least two guaranty associations. One of the associations handles life, health and annuities. The other association is a property casualty guaranty association; this association takes care of auto and home insurance. These associations are similar to the Federal Deposit Insurance Corporation (FDIC). The FDIC, on the other hand, was initiated after the bank failures of the Great Depression. Guaranty funds handle insurance companies which go bankrupt, in the same way that FDIC handles bank failures.
What if your insurance company is soon going to be out of business?
A defunct insurance company which has been placed under regulatory control will send you a letter informing you about their situation. The state’s guaranty association and the insurance company’s rehabilitator will also contact you. If the company does not inform you about their situation, you can still call your state guaranty association or your state’s department of insurance in order to know what your next steps should be.
The most usual process that will need to take place is for you to fill out forms and documents which will be sent to you. Along with these forms and documents are additional instructions which you will need to do. Most states encourage other companies to serve the policyholders of an insolvent insurance company. It’s possible that these documents will include forms that will assist you in moving your policy to another insurance company. When an insurance company announces insolvency, it is a common misconception for policyholders to stop payments as soon as possible. What you have to remember is that unless you are told not to, you need to continue making premium payments just like before so that your policy is kept in force. If you halt making payments, there’s a risk that your contract will be considered null and void for the reason of ‘nonpayment’.
Always review insurance companies beforehand.
Since guarantee associations may not always pay for the full limit of your claim, it’s always a good standard to check out the stability of an insurance company before purchasing or renewing a policy. There are several rating scales out there to insure the financial stability of a company. Some examples are A.M. Best, Moody’s Investor Services, and Standard and Poor’s Insurance Ratings Services. Most of the time, insurance companies will state the ratings they have received in order to convince potential clients of their stability.
As is always the norm, never purchase a policy just out of whim. Make sure you consider your options first, and make sure you are making the smart choice.