When an Insurance Company Fails

That all said, being the policyholder of a failed insurance company can be unsettling. One can't know with certainty what will happen, although in most cases, claims continue to be paid. There are nightmare scenarios, such as the Executive Life failures in the early '90s, when policyholders' cash values were frozen for months.

In AIG's case, if the parent company files for bankruptcy, it does not mean that the subsidiary insurance companies are part of that bankruptcy. Conseco(CNO Quote) is a prime example.

Conseco, a holding company, filed for bankruptcy in 2002, yet the subsidiary insurers were never taken over by state regulators and continued to operate throughout the company's reorganization. The same could happen with AIG because its problems are not within the insurance companies.

TheStreet.com's Financial Strength Ratings of AIG's 16 life insurance and annuity subsidiaries in the table below show that the individual insurers are fairly strong, well capitalized and able to pay claims.

Click here for larger image.

Source: TheStreet.com Ratings

The bottom line is that policyholders need to be educated about the strength of the insurance companies they do business with. A company failure could be relatively seamless to a policyholder or it could be disastrous. In the case of AIG, however, the problems do not lie in the insurance companies themselves so there's no need for policyholders to panic.

TheStreet.com Ratings issues financial strength ratings on each of the nation's 8,600 banks and savings and loans which are available at no charge on the Banks & Thrifts Screener. In addition, the Financial Strength Ratings for 4,000 life, health, annuity, and property/casualty insurers are available on the Insurers & HMOs Screener.