16 April 2013 0 Comments

CAN YOU BET YOUR LIFE ON IT?

family safetyWhen you buy a life insurance policy you pay a premium to a life insurance company in exchange for their promise to pay your beneficiary a sum of money that is vastly greater than that premium.  You intend to provide your beneficiary with financial stability if you die during the term of the policy.  Can you count on the insurance company to deliver on that promise?  Can you bet your life on it?

During the first two policy years the insurance company can only deny the claim if death is a result of suicide or if a  misrepresentation is made at the time of the application.  After that, the claim must be paid.  But, what if the insurance company becomes insolvent?  Under U.S. bankruptcy code, failing insurance companies may not declare bankruptcy.  Instead, they enter into a highly regulated resolution program run by their home state Guarantee Association (GA).  Since insurance companies are regulated by state laws, in 1983 the National Organization of Life and Health Insurance Associations (NOLHGA) was formed to coordinate insurance failures that cross state lines.

All insurance companies licensed to conduct business in the U.S. pay into NOLHGA to provide protection for policy holders.  There were some major company failures in the early 1990’s most notably, Executive Life and Mutual Benefit Life.  These failures resulted mainly from aggressive investment practices in “junk bonds” and high risk real estate transactions, coupled with long term guarantees tied to those current high interest earning investments.

Although GA funds do not provide 100% guarantees of all death claims and cash values, life insurance death benefits are considered the first obligation to be honored in the reorganization process.  These death benefit guarantees are honored ahead of annuity interest/ payments and permanent life insurance premium guarantees.

The bottom line is that between the current conservative investment practices, regulations and NOLHGA protection; life insurance proceeds are very safe.  With this said, it is smart to purchase from an insurance company with the financial strength to assure prompt payment of claims and continuation of coverage for the duration of your need.

Next, I’ll discuss the insurance company rating services.

 

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