What Happens to my Premiums and my pay-out if my Life Insurance Company Goes Bankrupt?

If you?ve put money into a life insurance plan then you want to know that it?s going to be paid out should anything happen to you. You don?t want to lose the money you?ve paid in or risk the chance of your dependents being left with no pay-out. So what happens if your life insurance provider ceases to exist before you do?

The first thing to note is that this is very unlikely to happen; insurance providers are one of the more stable enterprises and do not go out of business very often. Even during the recent global financial crisis they held their own in a seriously struggling economy.

The other thing to mention is that, much like for banking, there are protections in place to guard against any loses to policy holders. You can learn more?at https://www.hbf.com.au/other-insurance/life-insurance/home

How does this work?

Each state has its own Guaranty Association which is responsible for ensuring that your life insurance is protected. If a life insurance provider experiences financial difficulties they do not declare bankruptcy but go through a process that is managed by the state?s Guaranty Association and involves three possible levels of action.

  • Conservation.

This is exactly as to sounds; the association works with the insurer to try and resolve their problems and allow business to contuse. If this works then the business is eventually released from the process. If it doesn?t then the insurer is taken through to one of the other stages of action.

  • Rehabilitation

This is very similar in the way it works to Chapter 11 bankruptcy in that the state actually takes over control of the insurer and attempts to get it back to being solvent again.

  • Liquidation

This is the most serious level and is very similar to Chapter 7 bankruptcy in that the state attempts to find another insurer, who is in a healthier financial position, to take over the failing business. If this doesn?t work they look to break the business up and sell off the assets in order to secure the policies of those insured by the provider.

How will I know if this process has started?

If you insurer is experiencing difficulties they will write to you and explain the situation; get as much information as you can. You may also be able to keep an eye on what is happening by visiting the insurer?s website.

You should be kept informed through the process and your premiums and your insurance pay-out will be guaranteed to a certain level which varies depending on the state. You will need to submit a claim to the insurer directly for anything above this amount. You may still be paid this amount as the company goes through the liquidation process.

Should you keep paying your premiums?

It?s not a good idea to stop paying your life insurance premiums as this can cause problems with you getting your final pay out which would otherwise be guaranteed. You may be tempted to cash in a policy which is also not a good idea as you could potentially be losing out on a substantial sum of money.