The very idea of a life insurance company going bankrupt will certainly give pause to anyone holding a policy. To pay in years of premiums only to see the protection that the policy offers put in peril is certainly a thought that can cause real trepidation.
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However, such events are usually not as bad as they seem to be. This is especially true in the United States where there are layers of protections present that are put there by the states and federal government.
The Process of Bankruptcy for Life Insurance Companies
If your life insurance company should go bankrupt, the state in which you live has set up a guaranty fund through the insurers that will manage the policies until another company moves in and takes over. Basically, you will be notified about the status of your policy and how it is being handled until the time in which another life insurance company takes charge.
The next step is calling the company itself and the insurance department of the state to understand the status of the company as well as your policy. While the bankrupt status of each company is a little different, they should be able to answer questions about whether you should continue to pay your premiums or not and the consequences of such actions.
In all likelihood, there will be a notification about your policy and what will happen to it during this time.
Is Going Bankrupt the End of My Life Insurance Policy?
In most cases, the answer is no. This is because bankruptcy is in most cases a temporary state where the company gets a chance to reorganize its books and get rid of the debt that caused it to go bankrupt in the first place. This means that during the period of reorganization, the access to your life insurance may be limited in some ways, but the policy itself will have guarantees put in by the state so that if the holder should pass away, the beneficiaries will receive at least a large portion of the benefits themselves.
Of course, the guarantees will depend on the state in which you live. New York and many other states for example guarantees up to $500,000 per company for all their life insurance policies and annuity contracts. If you own more than $500,000, you may submit a claim and they may pay it even if they are being liquidated.
However, if the company goes into receivership where it is basically up for sale, then access to your life insurance and annuity may be limited. While such matters are generally resolved in a short period of time, some cases have lasted up to two years. During that time if you need access to the cash value, you may have to appeal to the state for “hardship” access.
Should I Get Life Insurance Policies from Different Sources?
One way to really be covered is by getting life insurance coverage from more than one source just in case one goes bankrupt. However, it is generally easier to choose a life insurance company with a stellar reputation and standing which also guarantees its policies to the fullest. Basically, such companies tend to not go bankrupt, but if it should happen then your policy has the best coverage possible.
The reputable and established insurers are unlikely to go bankrupt or out of business unless something extraordinary things happen to them. This is why you should be very careful while choosing a decent company. You should know the state rules and which particular steps to take in case the life insurance company goes bankrupt. You don’t need to worry a lot as in most of the cases; there is a way to recover some part of your benefits.