If Your Insurance Company Fails

So your holdings should be safe if your brokerage fails, but what if your insurance company goes belly up?

Financial planning firm Fisher Financial Strategies offers some answers:

• Insurance companies are regulated by the states, which typically require them to participate in a state guaranty fund or guaranty association. The purpose is to back up the policy obligations of any insurance company that fails.

• Often, the business of the failed company is transferred to other more stable insurers.

• If you didn't have any claims outstanding, your best strategy would probably be to seek new coverage. If you remain with the old company and the guaranty fund isn't sufficient to cover your policy, in order to maintain full coverage you'd have to pay additional premiums to the insurer that assumes the old company's policies, says Fisher. You could also accept coverage at a lower level.

• It's wise—especially if you're purchasing a large amount of coverage—to confirm that your insurance company is financially sound. There are several online sources of rating information, including A.M. Best and a guide at insure.com, Fisher says.

Here are more details from the firm:

The coverage provided in the event of a failure depends on the state. For life insurance policies, state guaranty funds typically provide coverage for at least $300,000 in death benefits and $100,000 in policy cash value (for policies such as whole life). For homeowner's and auto insurance policies, guaranty association coverage is also typically around $300,000, but it does vary. It's unlikely that an insurer would not be able to cover some of its claims even in insolvency, so the guaranty association typically acts to cover shortfalls. A guaranty fund would also cover prepaid premiums lost due to an insolvency.