"The Insider's Guide to Retirement and Insurance Planning"

Over the last few years we have seen seemingly solid American corporations go out of business. It doesn’t happen often, but it’s a legitimate fear of all investors: What happens if my life insurance company goes bankrupt?

First, don’t panic. Each state has a guaranty fund set up by the insurers that is responsible for managing insolvent insurance company policies and claims until another company moves in and merges the outstanding policies with its own. When trouble strikes the company, you will receive a letter from the company and/or state insurance commission.

Call the company and your state insurance department to get a good sense of where the company is in the bankruptcy and receivership process. Ask them what will happen if you continue to pay their premiums and what will happen if you stop paying premiums. The insurance company’s website will likely have copies of important documents to read and download.

Each state sets its own limits on the maximum amount of coverage they will guarantee. For example, New York guarantees up to $500,000 per company for all life insurance or annuity contracts issued by that company. If you own more than $500,000 in policies with the insolvent company, you may submit your claim to the company and they may still pay it while they are being liquidated. Life insurance or annuity contracts at other companies have their own $500,000 protection limit.

If your insurance company is taken into “receivership,” access to your annuity and life insurance cash values may be limited or suspended while the company looks for another insurer to buy it out. Companies usually work quickly to settle their troubled balance sheets, but it’s not unheard of for it to take as long as two years. If you need access to your cash values in the meantime, the state receiver will often make provisions for “hardship” access.

Variable annuities and variable life insurance contracts have an interesting status. The cash values invested in the fixed account (that which guarantees a minimum rate of return) are covered by the guaranty fund. Investments within the separate market-based investment accounts are generally kept separate from the rest of the insurance company’s funds and can not be used to pay its liabilities.

Should you limit your exposure to any single insurance company? There are 173 life insurance companies licensed to do business in New York alone. But among all of those companies, only a handful are really stellar carriers with the top ratings for financial strength. Having a guaranty corporation backing up your life Retirement Insurance Company company is not an excuse to take a policy from a poorly rated company. Some diversification would be prudent since we have seen that “financial strength” is sometimes an illusion.