What Happens if an Insurance Company Goes Out of Business?

By Phyllis Shelton,President, GotLTCI.com

Recently, I received an important question through my website about what happens if an insurance company is liquidated. As most of you know, I’ve been in this business for decades and I’m pleased to report that the liquidation of insurance companies is an incredibly rare phenomenon.

It’s a fair concern and I’m sure it’s one that many of you have thought about. I’m sharing this information because I want you to be comfortable not only with the long-term care insurance policy that you purchased through my team but also the strength of the carrier who is bearing the risk of and responsibility for that policy.

Comment:

“I have a full paid-up 10-year-pay LTC policy. Per my state’s insurance office, having an active policy like this is not enough -- you need an active claim.”

According to a representative at the state’s Department of Insurance (DOI), “If the carrier were to undergo liquidation AND she did not have an active claim, then her policy would end.”

Signed “K” from Nebraska

My Response:

Thank you for your comment. I will respectfully disagree with the representative at your state DOI. When I have questions about carrier solvency and the laws and regulations around it, I go to the National Organization of Health and Life Insurance Guaranty Associations (NOHLGA) website (1). In this instance, I found specific answers that support my understanding that the guaranty associations will continue coverage and pay claims, not just handle active claims at the time of liquidation.

For instance, part of the response to Frequently Asked Question #2 says, “If a member company is ordered liquidated by a court with a finding of insolvency, the guaranty associations of the states where the company was licensed continue coverage and pay claims under the member company’s covered policies in accordance with state laws.” (2)

Additionally, the response to FAQ #3 repeats the “continue coverage” phrase: “Guaranty associations typically are activated to continue coverage and pay claims when a court issues a liquidation order with a finding of insolvency against a member company.”

Response to FAQ #4: “Depending on the type of contract and other factors, guaranty associations typically continue coverage to the owner of a policy, contract, or group certificate, and to the extent applicable, to the beneficiaries, assignees, and payees of those owners.”

Response to FAQ #10 states there is a specific amount of coverage which is typically $300,000 for long-term care insurance. This is more liberal than the $250,000 FDIC-insurance for bank deposits. What if your claim is more than that? It goes on to say,

"In most states, benefit amounts above the guaranty association levels become a claim against the estate of the insolvent insurer, and policy owners may recover a portion of that claim when the company’s assets are liquidated."

You can check your specific state’s guaranty association here.

Response to FAQ #7 says the only time the policy is terminated is if the policyowner stops paying premiums that are due. This doesn’t apply to you as your policy is paid up.

You are more likely to see a bank failure than the failure and liquidation of an insurance company. I hope that this policyholder was able to go back to his DOI representative to provide this important information.

You are more likely to see a bank failure than the failure and liquidation of an insurance company

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Phyllis Shelton, is the President of Got LTCi, part of a long-term care insurance outreach that she founded in 1991. She is widely considered to be the leading long-term care insurance sales trainer in the country. Her book, Protecting Your Family with Long-Term Care Insurance, provides cutting edge information about all phases of financing long-term care. Suze Orman says, “Long-term care insurance for many is the most important insurance you can buy if you can afford it. Phyllis Shelton is the only person I trust to keep me up to date on what I need to know. Read this book.”

Phyllis can be reached through her website at Contact Us | Got LTCi.