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What happens if your life insurance company goes out of business?

Sep 4, 2020 3 Minute Read

You’re buying life insurance to protect your loved ones for years to come, so it’s important to make sure your policy will actually be around when you need it. During tough financial times, this question may be on more people’s minds: What happens if your life insurance company goes bankrupt?

The good news is that it’s rare for a life insurance company to go out of business. Like home or car insurers, life insurance companies are heavily regulated, and even if your insurance company goes bankrupt, there are typically several protections in place to help make sure claims will still be paid out to your family and loved ones.

Still, the financial health of your insurance company is definitely something to consider when choosing something like a term life insurance policy. Here’s what to know.

What happens if my life insurance company goes out of business?

Even in a financial downturn, it’s very unlikely for your insurance company to go out of business. It’s more common for a troubled company to merge with another insurer, but bankruptcies do happen.

Keep in mind that this is usually a last resort for a business. Regulators will first try to work with a life insurance company to restructure and save it. Even if it’s too late, there are some safeguards in place to help the insurer pay its obligations.

  • Statutory reserves. This is a financial cushion that companies are required to hold to pay out death benefits if they go under. The statutory reserves are based on factors that include the number of policyholders, the amount of benefits they might need to pay out and the revenue that they are bringing in.
  • Reinsurance. This is extra protection that companies purchase to help cover claims, in case there’s a surge. The reinsurer and the insurance company split cash payments and the responsibility for paying out the benefit. In the case of an insurance company going bankrupt, the reinsurer would help pay claims.
  • Guaranty associations. Life insurance companies are required to belong to regulated guaranty associations to help protect customers. If a life insurance company goes bankrupt, the guaranty association can help to sort things out, potentially manage assets and/or transfer existing policyholders to a new insurance company. In this scenario, if you have a policy and die, your beneficiaries’ payment would be capped on a state-by-state basis. The payment usually tops out at $300,000.

Choosing a financially strong life insurance company

One of the best ways to avoid dealing with this challenge is to choose a strong life insurance company that’s not likely to go bankrupt in the first place. When reviewing companies, consider: Is the insurer licensed? Are they in good financial standing? Insurance company ratings from recognized credit agencies, like AM Best, Standard and Poor’s, or Moody’s, can provide a clearer picture of a company’s stability. Learn more about ratings here.

eFinancial is here to help. We work with top-rated insurance companies, and our team of agents is here to help you pick a term life or permanent life insurance policy you can depend on for the long haul. Get a quote or give one of our agents a call today.


At eFinancial, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed and updated regularly to ensure the information is as relevant as possible.