Life insurers aim to cover the lives of people. However, the ‘life’ of a life insurer can be under threat because of insolvency. Insurers fail for a number of reasons- from disasters to financial mismanagement. Knowing what will happen to your life insurer (and life insurance contract) can prevent you from losing like your bankrupt insurer.
Intervention is the option that regulators exercise if a life insurer becomes insolvent. Insurance regulators intervene whenever there is an inability to meet the liability to policyholders. The aims of the regulator will be to seek the continued existence of the life insurer. It does this by either restructuring or rehabilitating the insurer. If the insolvency is the result of poor management, the regulator will even assume management of the insurer.
The severity of the situation will determine if and applications that are pending would be issued. In a situation of insolvency, new life insurance contracts will remain pending until the situation is resolved.
Issued policies remain in force
Policies that were issued before the life insurer declared bankruptcy would remain in force once premiums are paid. This is why it is important to maintain your premiums if you want to maintain the options that will be made available to you. Particularly where cash values are involved, you do not want to lose more than you need to.
Claims that were made before insolvency would be given priority. Unless the insurer failed to set aside sufficient funds to honour its obligations (which is a breach of its regulations), death claims should be honoured in full. If the life insurer is in an untenable situation then there are other last resorts. Claims made after the insurer filed for bankruptcy may or may not be honoured, depending on the severity of the situation.
State guaranty funds
If all else fails, the last resort is to use state guaranty funds to meet the obligations to claims made by policyholders. Claim coverage will be honoured, but not necessarily fully either.
Transferring your policy to another insurer
Sometimes, provisions are made for existing policies to be transferred to a viable insurer. This option is only available for policies that remain in force. It is critical to pay your premiums in a timely manner.
When your life insurer goes bankrupt, the situation may be resolved. The important thing is to continue paying your premium to maintain coverage. After all, some options work in your favour. Although bankruptcy comprises the integrity of the life insurance promise, there is a safety net to ensure that your family is not left unprotected.