Recent troubles with former insurance stalwart AIG have raised questions about the status of different insurance products in case a particular insurer becomes insolvent. For instance, what if the company underwriting your life insurance policy goes under just when your family needs the money?
The Risk Of Complete Loss Is Minimal
Fortunately, the risk of having the insurance policy you’ve been paying on for years suddenly become worthless is minimal. State insurance regulators are very proactive about protecting policyholders in case the worst happens. Insurance companies themselves are required to keep ample cash reserves on hand at all times to ensure future losses are payable, and policyholders themselves are usually first in line to get their money in case of bankruptcy. Futhermore, each state has in place a guaranty fund, funded by the insurance companies themselves, which acts as a sort of FDIC insurance for policyholders. The amount insured varies by state, but most states guarantee around $300,000 in life insurance death benefits.
But Risk Remains
Unfortunately, $300,000 in protection isn’t enough for many families. With inflation, many modern life insurance policies are underwritten for $1 million or even more. Would you be comfortable losing more than 2/3 of your insurance coverage if your underwriter declared bankruptcy? I wouldn’t. After all, life insurance is meant to guard against the worst. One way to solve this problem is to find out the guaranteed amount for your state and buy smaller policies from several different life insurance companies so that overall, the sum of your death benefits is completely covered. This tactic applies equally well for annuities and other forms of insurance, too. Just as with investing, it’s wise to diversify your exposure when it comes to insurance coverage.
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4 responses so far ↓
1 Curt // Oct 9, 2008 at 4:31 pm
Hey, it’s hard enough paying the bills while alive - and now we have to worry about paying the bills when were dead. I guess this is probably a bad time to die. I’ll have to wait a few years for the market to recover.
2 Carnival of Personal Finance #174 - The Columbus Day Edition | Greener Pastures: Personal Finance // Oct 13, 2008 at 10:07 am
[...] from Amateur Asset Allocator presents What If Your Life Insurance Company Goes Bankrupt?, and says, “While the risk of losing all your life insurance benefits due to an insurance [...]
3 Weekend Link Love And Carnival Roundup | Amateur Asset Allocator // Oct 18, 2008 at 1:48 pm
[...] thanks to Lisa at Greener Pastures for including my post What If Your Life Insurance Policy Goes Bankrupt in this weeks Carnival of Personal Finance: Columbus Day Edition. Here are a few of the posts I [...]
4 Insurance agent // Nov 1, 2008 at 10:33 am
I agree that the risk of complete loss is minimal. Life insurance industry isn’t the industry which is afraid of temporary crises (hope it is softens in nearest future)
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