The state then conducts an accounting of the company's assets and liabilities, transfers those assets to cash and distributes it among creditors with valid claims against the insurer. Policyholders can then make claims through their state guaranty association, sometimes referred to as a liquidation bureau.
"In essence, the state becomes the administrator of your insolvent insurer," says Mike Barry, a spokesman for the Insurance Information Institute. "Consumers should feel confident that their life insurance policies are safe. We have a very strict system of state regulation in the U.S. which sees to it that life insurers are adequately capitalized, and that has kept the number of insolvencies to a very minimal level."
Barry says most state insurance departments would first try to convince a healthy life insurer to accept some or all of the insolvent insurer's "book of business," providing yet another safety net for policyholders.
Guarantees in placeAs an added layer of protection, all companies selling life or health insurance policies must also be members of their state guaranty association, which collects fees from insurers and provides coverage to resident policyholders in the event of insolvency, up to specified limits.
Laws governing those limits and the types of policies covered can vary by state, but most set basic limits of $300,000 in life insurance death benefits and $100,000 in cash surrender or withdrawal value for life insurance.
The overall benefit cap in most states for an individual life is $300,000, though some states set higher maximums, NOLHGA reports.
If your policy value is higher than that amount, you won't necessarily suffer a loss.
According to NOLHGA, the value of your policy in excess of guaranty association benefit limits is eligible for submission as a policyholder claim against the estate of the failed insurance company. The contract holder may receive distributions as the company's assets are liquidated by the receiver.
"These companies usually have substantial assets even when they've become insolvent. So if your policy is over the guaranteed limit, that amount becomes a claim and because you're a policyholder, those claims get paid out first," says Sean McKenna, a NOLHGA spokesman.
Don't head for the exits
Just because your insurance company gets downgraded or placed under the control of state regulators does not mean you should run out the door, says Rita Cheng, a Certified Financial Planner for Ameriprise Financial Services in Bethesda, Md., who says she's received calls from concerned clients.
And whatever you do, don't cancel your policy until you've got a new one in hand, she says. Who's to say you still qualify for the same rates -- or any insurance coverage at all -- if your health has changed for the worse?
"If you're not comfortable, do your due diligence and apply for coverage with another company, but don't make hasty decisions," says Cheng. "The last thing you want to do is be walking around uninsured."
Another piece of advice? Don't stop making payments to your current policy, even if your company is in receivership (under state regulatory control). Nonpayment of your premium may cause your policy to be canceled or reduced in value.