Although the insurance industry is regulated, the companies can fail in business for a number of reasons. For example: the insurers often underestimate the size of payments.
According to the Society of Actuaries, the insolvency of US insurance companies peaked in the early 1990s, with more than 50 companies going bankrupt in 1992. 10 companies leave the US market annually.
How does the government protect policyholders?
When an insurance company is faced with financial problems, each state’s guarantee system comes to the rescue. There are special organizations that accumulate insurers’ contributions to cover payments to people in the event of a LIC bankruptcy in most states. All licensed LICs are the mandatory participants in these funds.
If the insurance company becomes financially unstable and cannot pay the policyholder’s claims, the state insurance commissioner can take charge of the problem organization. First, the commissioner will try to rehabilitate the company in order to improve its financial situation. If this plan does not work, the commissioner is replaced by a liquidation commission. After that, the policy of the problem company is transferred to another LIC. This scheme guarantees subsequent insurance payments to customers. If the insurance company does not have enough funds to pay customer’s claims, the state fund will be liable for bankruptcy obligations.
In most states, benefits are limited to:
$300,000 - life insurance benefit
$100,000 - life insurance
$250,000 - annuity
$500,000 - payment to healthcare organizations
$300,000 - long-term healthcare allowance
$300,000 - disability allowance
$300,000 - accident payout
If your insurance policy exceeds these limits, most likely no one will cover the difference, but you can apply for compensation after the liquidation sale.
Source: https://www.forbes.com/advisor/life-insurance/company-out-of-business/
Photos are from open sources.
