You think about insurance as a way to protect your assets. Life insurance is especially important, since it is meant to protect your family if you die. You pay a premium, and you expect the coverage to provide for your family later on. Rarely do you consider who insures the insurance company.
However, this is an important consideration. If your life insurance company goes down, what happens to your policy? What about all those premiums you paid, and the coverage you have purchased?
Life Insurance State Guarantee Funds
First of all, it’s important to understand that there is no federal guarantee of insurance companies. While the FDIC protects your money against bank failure, and the SPIC can provide you with some protection in the event that your broker is ripping you off. With insurance companies, the protection comes from the states.
This means that you need to understand your state’s policies related to life insurance (and to annuities, if applicable).
Most states first try to get your policy transferred. This is the best outcome if your insurance company goes out of business. If the state can get your policy transferred to another, more stable, insurance company, you retain your coverage, and many of the terms are likely to remain the same (although they could change as well).
But what if your state can’t find another insurance company to take over your policy?
In that case, you might be out of luck to a certain degree. Once that happens, the state guarantee fund becomes the administrator of your policy. However, it’s important to note that most states have a limit on coverage. This means that if you have $500,000 worth of coverage, but your state only guarantees a death benefit of $300,000, your family is out some of the money upon your death.
Note: If you have some types of annuity, you might not be covered at all. Double check your state’s guarantee fund policy on annuities before you commit.
It is possible to get insurance coverage through multiple providers if you want to maximize your coverage. However, getting life insurance through one provider can be inconvenient enough; it can be even more inconvenient to layer your coverage. On top of that, you might end up paying more overall for the same amount of total coverage.
Check the Health of Your Insurance Company
Before you purchase a life insurance policy, it can help to check into the health of the insurance company. Ratings companies provide insight into the strength of insurance companies, including information about how fiscally sound an insurance company is. While ratings are far from perfect, they can help you identify problems, as well as get a feel for how stable the company is.
If you choose a life insurance company that is strong, you are more likely to avoid the issues associated with a failed life insurance company. This is a situation in which it can make sense to go with a more well-known name, rather than an obscure life insurance company.
In many cases, if your life insurance company goes out of business you could be stuck with less coverage. You might end up with a different insurance company, or you could be subject to the limitations of the state guarantee fund. In most cases you are better off researching the company before you make a decision. Buy a policy from a strong company with a good reputation, and you are more likely to have improved peace of mind.
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Photo Credit: Butte-Silver Bow Public Library