When an Insurance Company Fails

If the company is in dire financial shape, the regulator will take it over and immediately begin liquidating its assets. The condition of the company and the reason for the regulatory takeover determine how the failed company and its policyholders will be handled.

In the case of a major company failure in which subsidiaries are located in multiple state jurisdictions, one of the states would take the lead in handling the rehabilitation in cooperation with the other state regulators.

What happens to policyholders is a case-by-case situation, but typically, insurance claims continue to be paid. If you hold a life insurance policy and you pass away, the death claim on the policy would usually be paid. If the policy has a cash value, as would be the case with a whole life or universal life policy, the outcome is less clear.

The receiver could, in that case, freeze the cash values and not release them until such time as the assets of the company are valued. At resolution, you could be made whole or receive only a portion of your cash value.

If you own a fixed annuity and you are in the payout phase, the payments would typically continue. What could potentially change is the interest rate that is credited to your initial investment. If the receiver, or a potential buyer, determines that the interest rate is too high, a court order could be issued to lower the crediting rate on that block of annuities.

If you own a variable annuity, it would be slightly different. The assets underlying your contract are separated out from the general assets of the insurance company, so there should be no question of the value of the contracts. Your payout would typically continue, and the value of your annuity would remain tied to the underlying assets.