What if my insurance carrier goes bankrupt?

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PostPosted: Mon Feb 01, 2010 12:42 pm   Post subject: What if my insurance carrier goes bankrupt?  

I had applied for a life policy with a new agent. I'm scared as to how I'd stand if this carrier ever goes bankrupt. Has it ever happened in the past? what do I do? I was thinking of getting another policy as a back-up plan.


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Dianawillis
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PostPosted: Mon Feb 01, 2010 9:39 pm   Post subject:   

What carrier? Most states have some sort of guaranty fund that insurers are required to pay into in the event that a carrier becomes insolvent and nobody buys the block of business. As far as I know, there has never been a death claim that was not paid due to carrier insolvency, though I could be wrong. Another company will usually take over and are obligated to fulfill the existing contracts.



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PostPosted: Mon Feb 01, 2010 10:36 pm   Post subject:   

Your state's specific guaranty fund will cover death benefit to a certain level, you should check, or can tell us what state and we can tell you.



If your death benefit falls below the state covered amount, there's little to worry about, it's backed by the guaranty corp, which will pay the claim if your insurer cannot.



If you are above, most insurance bankruptcies are handled by the state coming in and using different large insurance companies to handle the current business held by the failed insurer.



What has you worried about your current insurer? The best number to look at with respect to this issue is capitalization ratio. It represents the amount of money the insurance company has in access of it's liabilities with respect to it's overall assets. The higher this number, the more "room" there is for the insurer to loose in assets before failing to make good on it's promises.

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PostPosted: Mon Feb 01, 2010 10:41 pm   Post subject:   

Quote:
As far as I know, there has never been a death claim that was not paid due to carrier insolvency, though I could be wrong.




You are correct about this as it pertains to the U.S. Life insurance industry.



Why do insurance companies step in and pay the claims? Life insurance is nothing more than a promise. If people don't trust the promise, people don't buy coverage. As soon as claims don't get paid, the insurance industry as we know it is done.
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PostPosted: Tue Feb 02, 2010 7:51 am   Post subject:   

I'm a resident of Delaware. Will the state guarantee fund cover for at least 80% of my death benefit?


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Dianawillis
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PostPosted: Tue Feb 02, 2010 12:29 pm   Post subject:   

According, to this website, it is up to $300,000 per person, regardless of how much coverage you have in force. http://www.delifega.org/faq.cfm?id=105



Guaranty funds should not be relied upon for payment in the event of carrier insolvency though, they are merely a backstop....what company are you worried about?



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PostPosted: Wed Feb 03, 2010 8:44 am   Post subject:   

I'd once been advised to stay away from these Guarantee funds.

Quote:
Guaranty funds should not be relied upon for payment in the event of carrier insolvency though, they are merely a backstop


Would you please explain the drawback of these funds?

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PostPosted: Wed Feb 03, 2010 1:18 pm   Post subject:   

What do you mean stay away from them? You can't do anything with them, they are just a fund that exists in case an insurer goes bankrupt and nobody takes over the block of business.



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PostPosted: Wed Feb 03, 2010 6:57 pm   Post subject:   

State Insurance Guaranty Associations exist to (hopefully) detect and prevent insurer insolvency. As well, they exist to pay claims arising from individual and group annuities, life and health insurance contracts that are issued by authorized insurers. Simply put, they are the insurance equivalent of the FDIC.



These associations are run by each individual state and all authorized insurers are required to be members of their respective associations. Each state has an association for both life and health and P&C policies.



They have nothing to do with the client's purchase, agent recommendations or anything else other than what's stated above, which only comes into play in the event of insolvency, liquidation or rehabilitation orders given by a state insurance commissioner.



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PostPosted: Thu Feb 04, 2010 9:15 am   Post subject:   

Someone had probably mentioned that the guaranteed funds won't compensate for our losses entirely. To me it seemed useless at that point of time!


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PostPosted: Thu Feb 04, 2010 5:55 pm   Post subject:   

These are known as "Guaranty Associations" and not "guaranteed funds." I would like to respond to this comment:

Quote:
Someone had probably mentioned that the guaranteed funds won't compensate for our losses entirely. To me it seemed useless at that point of time!




The FDIC only guarantees funds up to a certain dollar amount as well. My point, I guess, is that something is always better then nothing. Would you rather receive nothing for a death benefit claim or $300,000? Without the Guaranty Associations, you wouldn't get a penny. You'd have to sue the insurer, and since they're probably under a liquidation, conservation or rehabilitation order, they'd be immune from prosecution at that point.



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PostPosted: Thu Feb 04, 2010 7:13 pm   Post subject:   

Again, I don't think the question most of us asked has been answered, what prompts the worry about bankruptcy?

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PostPosted: Fri Feb 05, 2010 6:24 am   Post subject:   

Quote:
Again, I don't think the question most of us asked has been answered, what prompts the worry about bankruptcy?


I'm told that A.M.Best has recently withdrawn the rating "A" for my carrier's financial strength. As I've mentioned earlier, I'm from Delaware and the insurer carries on their operations here at Newark. Now, I don't wish to add more details regarding this in an open platform.

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PostPosted: Fri Feb 05, 2010 1:05 pm   Post subject:   

Quote:
Guaranty funds should not be relied upon for payment in the event of carrier insolvency though, they are merely a backstop




Insurance companies, with orders from the state insurance regulators are required to keep adequate reserves for all times. This is only a professional approach so that they can ensure payment of future losses. Each state has a guarantee fund, financed by the insurance companies themselves. The amount may vary from one state to another.


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PostPosted: Sat Feb 06, 2010 8:23 am   Post subject:   

Quote:
As soon as claims don't get paid, the insurance industry as we know it is done.




This is the essence of the matter. Insurance companies are in business to make money (like any other business). They stay in business by paying claims.



All admitted insurers in any given state pay into the state's insurance guaranty fund(s) according to the lines of business they write. If an insurer is conserved by the state regulator (Commissioner, Superintendant, etc), and subsequently liquidated, the proceeds from the sale of assets are turned over to the guaranty association for use in paying claims. (Most only pay up to 80% of the death benefit or cash value, to a specific limit that varies from state to state.) But if claims exceed assets to the point that the guaranty fund runs out of its own funds to pay claims, they assess all the remaining admitted insurers enough to cover the claims.



As to why AM Best would revoke a financial strength rating, anything could cause that, from actual poor financials that need to be verified, or a company's acquisition by another. The FSR is no guarantee of an insurer's ability to pay claims, merely an educated guess.


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