In my last two entries I’ve discussed when your life insurance company might deny or delay a claim. But there is one other contingency to consider: What if your Life Insurance Company goes out of business?
All insurance companies in the U.S. are regulated by state laws, not by the Federal Government, so any specifics given here will relate to California law, but the remaining 49 states will be very close. All 50 states have Guarantee Associations that deal with insurance company insolvency and the protection provided to policyholders.
When a state Commissioner of Insurance deems that an insurance company is in financial jeopardy they may step in and place that company under a conservatorship. The state Insurance Commissioner acts as conservator for the benefit of the policyholders. In most cases a Guarantee Association will continue coverage as long as premiums are paid or cash value exists. It may do this directly or it may transfer the policy to another insurance company.
Just as the FDIC imposes limits of protection for bank deposits, each Guarantee Association will have maximum protected amounts. In California Life Insurance death benefit protection is 80% up to a maximum of $300,000. Life Insurance net surrender values are covered at 80% up to a maximum of $100,000. Present Value of fixed annuity benefits and net cash value is covered at 80% to a maximum of $250,000. In practice, life insurance beneficiaries have historically been paid 100% of all claims due them. You can check your own state’s limits by going to your Insurance Department’s website.
In the early 1990’s there were a number of insurance company failures that were primarily due to investment underperformance. In 1991 Mutual Benefit’s failure was due to a high percentage of assets invested in commercial mortgages and real estate in a climate of a weakening economy, corporate downsizing and empty office spaces. They had four jumbo real estate investments and all four went sour. In the same year Executive life was seized by the California Department of Insurance. The most important cause was excessive exposure to junk bonds. The amount of junk bonds was beyond a reasonable level when the junk bond market was going into a state of collapse.
Since the early 1990’s disclosure and capital has been improved at most large companies. Investments are more diversified with the most aggressive of companies having no more than 15% in high yield bonds. The rating companies have also answered a wakeup call to be more conservative in handing out high grades to companies with questionable practices.
With this said, it is your responsibility to review the financial strength of the company from whom you plan to buy life insurance. Ask your agent to show you a comparison of financial strengths using a program available from Vital Signs.
Next, I’ll be discussing a method of Capital Transfer that provides both life insurance and long term care protection.