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A bad bank is causing you problems? You’re covered by the Federal Deposit Insurance Corporation (FDIC). Have you ever lost a brokerage account? You are at least partially protected by the Securities Investor Protection Corporation (SIPC). Does your insurer go bankrupt? No worries. Your coverage will continue.

Despite the federal takeover of AIG in September 2008, many people are surprised to learn that the role of protect insurance companies failures actually falls to state governments. Insurers licensed to conduct business in their respective states are regulated by state insurance regulators. Here’s what you need to know about your life insurance policy.

Key Takeaways​

  • Banks and brokerage firms are protected by the federal government in the event that they fail, but life insurance companies are not protected.
  • Life insurance policyholders are protected in case of a life insurance company going out of business by state governments-specifically, state insurance regulators who monitor the financial health of life insurance companies.
  • As a first step, state regulators will attempt to transfer an insurance policy to a more stable fund if an insurance fund fails. The policy will instead be maintained through the state’s central guarantee fund if that is not possible.
  • By reinsurance, a life insurance company’s bankruptcy risk can be reduced.
  • Bankruptcies and failures are rare. Since the 2008 financial crisis, no life insurance companies have declared bankruptcy, according to the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA).

    If a failure or bankruptcy does occur, then consumers are protected by safeguards. They include:
    • Reserves statuaries
    • Reinsurance
    • Guaranty association membership
  • State law requires life insurance companies to maintain capital reserves to cover payouts to policyholders in the event of business failure. Depending on the state, the amount that must be held back can vary, but these reserves, along with other assets of the company, can be used if the company goes bankrupt.

    Insurance companies use reinsurance to reduce the risk of potential losses in the event of a business failure. By purchasing insurance policies from other insurers, life insurance companies spread out the risk. As a result, if one company goes bankrupt, the other companies can step in to ensure that any claims or death benefits are paid out.

    The NOLHGA is another type of protection against losses. Members’ associations can guarantee payment of benefits if a member’s life insurance company goes out of business. According to state law, an association’s payment may be capped at a certain amount, and membership is usually required.


    You may need to seek financial remedies through reserves or reassurance before a guaranty association will pay benefits if your life insurance company fails.