When an insurance company faces financial difficulties, the guaranty system comes to the rescue. All 50 states, the District of Columbia, and Puerto Rico have insurance guaranty associations, according to the National Conference of Insurance Guaranty Funds (NCIGF).
The following associations are in most states:
- Life and Health Insurance Guaranty Association, which covers life, health, disability, and long-term care policies, as well as annuities;
- Property and Liability Insurance Guaranty Association, which covers auto, homeowners, and workers' compensation policies;
Insurers licensed to sell insurance in a state must be members of the state's guaranty association and pay into a guaranty fund that protects policyholders.
If an insurance company becomes financially unstable and can't pay claims, the state's insurance department may take over the company through a process called assumption.
What to expect if your insurance company goes bankrupt
If an insurance company doesn't have enough funds to pay policyholders' claims, the guaranty association uses the company's assets and guaranty funds to pay claims. However, states set a limit on sizes of claims to be paid. Most states cap payouts at the following amounts:
- $300,000 in death benefits;
- $100,000 in cash or life insurance withdrawal amounts;
- $250,000 in annuity benefits;
- $500,000 in major medical or hospital benefits;
- $100,000 in other health insurance benefits;
- $300,000 in long-term care insurance benefits;
- $300,000 in disability insurance benefits;
- $300,000 for property and liability insurance claims.
There is no limit on employees' accident insurance benefits.
Source: https://www.forbes.com/advisor/life-insurance/company-out-of-business/
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