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What to do if your life insurance company goes bankrupt

Your policy should still be safe, no matter what happens.

Updated

Fact checked

Life insurance companies can go under like in any other industry. While uncommon, 11 insurance companies declared bankruptcy since 2010. But life insurance is a heavily regulated industry where policyholders are largely protected from a company going bankrupt.

What happens if my life insurance company goes bankrupt?

When a life insurance company goes bankrupt, the company no longer exists in its current form and no longer takes new business. Bankruptcy for businesses usually come in two forms:

  • Chapter 7 bankruptcy. Under this filing, the company ceases its operations. The responsibility for the business’s debts and assets falls to the bankruptcy’s trustee, not the business’s owner.
  • Chapter 11 bankruptcy. This filing allows the business to continue operating and reorganize its debts.

Could my life insurance company avoid going bankrupt?

If your life insurance company is in financial trouble, it doesn’t necessarily mean that it will file bankruptcy. Bankruptcy is usually a last resort for businesses.

Before going bankrupt, a financially-troubled life insurance company may try any of these solutions:

  • Help from the state insurance commissioner
    Insurance is regulated at the state level and each state has an insurance commissioner in charge of the state’s insurance activities. Each state has a guaranty association — a fund that each company operating in the state contributes money to cover a company in case its unable to pay its debts.

    The state’s guaranty association takes over the bankrupt company’s assets and liabilities, and becomes responsible for paying out policy death benefits. There are limits for how much the guaranty will pay, however. Typically, the limit is:

    • Up to $300,000 in death benefits
    • Up to $100,000 in cash value
  • Acquisition by another company
    An acquisition is something that can happen whether an insurance company is bankrupt or not. If you have a life insurance policy from a company that was bought out, the new company will still honor all policies that are in force through the old company.

    If a company is in financial difficulty but it still has potential, a larger company could buy it out to prevent it from declaring bankruptcy. This option allows the old company to continue operating in some form.

    Sometimes the buyer will allow the old company to continue operating under its old name, in which case you would still be dealing with the same company as before — it’s simply owned by another parent company.

  • Uses reinsurance arrangements
    If neither the state or another company takes over your bankrupt life insurance company, your policy should still be honored if you file a claim.

    Many, if not all, insurance companies have reinsurance arrangements, where the reinsurance company acts as a financial backup to a regular insurance company. If your life insurance company can’t pay out any more money, then its reinsurance company will step in and cover extra payment amounts.

How to pick a financially strong life insurer

Though there are backup options for your policy in case your life insurance company goes bankrupt, it might give you more peace of mind to be with a financially strong company that will outlive your policy.

You could look at how long the company has been in business to see if it has already been around for a long time without issue. However, the most effective way to analyze an insurance company’s financial health is to look at its ratings.

The most well-known rating services are:

  • AM Best. A New Jersey-based credit rating agency which has a focus on the insurance industry.
  • Moody’s. Based out of New York, Moody’s is part of Moody’s Corporation, which is a large financial services company.
  • S&P. Also based in New York, Standard & Poor’s rating agency is a part of S&P Global.
  • Fitch. Based out of New York and London, it’s the third of the Big Three credit rating agencies in the US, along with Moody’s and S&P.

How to read financial strength ratings

Each rating company has a slightly different way of rating a company, though they all use some type of letter grading system ranging from excellent to poor.

You can learn how to interpret a company’s financial ratings to help you analyze its financial strength. Here are the services rating scales:

  • AM Best. Ratings range from a D to an A++. A Good rating begins at B+, while the Superior rating is either an A+ or an A++.
  • Moody’s. Similar to AM Best, it uses an extra letter instead of a “+”. Moody’s worst rating is a C, while it’s best is an Aaa. Moody’s ratings of Aaa, Aa, or A are its best ratings. It also uses numerical modifier 1 through 3 to add further description, such as Aa1.
  • S&P. Almost identical to Moody’s system. It uses capitalized letters, so its best ratings are AAA, AA, and A. It also adds a D rating for a company that has already defaulted.
  • Fitch. Identical to S&P’s rating system. It’s best ratings are AAA, AA, and then A, while CCC, CC, or C marks a highly vulnerable company.

Compare life insurance companies with strong financial backing

Name Product Issue age Minimum Coverage Maximum Coverage Medical Exam Required
Sproutt
18 - 100 years old
$50,000
$3,000,000
No
This life insurance broker combines technology and the human touch to match you with a policy tailored to your needs.
Policygenius
18 - 85 years old
$10,000
$10,000,000+
Depends on provider and policy
Compare affordable quotes from 12+ A-rated life insurance companies side-by-side.
Bestow
21 - 54 years old
$50,000
$1,000,000
No
Affordable 10- and 20-year term life insurance policies with instant quotes and no medical exams.
Everyday Life
20 - 75 years old
$100,000
$10,000,000
No
Build a customized laddering strategy to target specific financial responsibilities and save on term life.
Fabric
25 - 60 years old
$100,000
$5,000,000
Depends on policy
Get affordable term life insurance with accelerated underwriting or no-exam coverage up to $1,000,000. Available in all states except CA, NY and MT.
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Compare up to 4 providers

Top 6 picks for financially strong life insurance companies

Each year we compile our own ratings for life insurance companies based on which type of person each one is best for.

CompanyAM BestMoody’sS&PFitch
MassMutualA++Aa2AA+AA+
PrudentialA+Aa3AA-AA-
Global Atlantic Financial GroupAN/AA-N/A
Legal & GeneralA+Aa3AA-AA-
State FarmA++Aa1AAN/A
New York LifeA++AaaAA+AAA

Bottom line

Life insurance companies go under from time to time. Fortunately, there are saeguards in place to make sure your policy still gets paid out if your life insurance company fails — as long as you keep paying the premiums. Before you review life insurance policies, you can check out the financial health of the company by looking at its financial ratings.

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