Insolvent Insurance–When Insurance Companies Goes Out Business

Another potential risk is that the insurance company providing insurance coverages may fail. Unlike banks, which are federally insured, there is no government backing to insurance policy guarantees. If the auto insurance company becomes insolvent, the amount you eventually receive might be less than you think. When deciding where to invest your premium cost dollars, it’s important that the company and your money will still be there when it comes time to withdraw your cash values or pay your beneficiaries your death benefit.

State insurance guaranty associations have been set up to provide some protection insurance for policyholders, claimants, and beneficiaries from insurance company failures. Any insurance company wanting to do business in the state must become a member of the guaranty association, and is “assessed” to help pay for the association’s expenses. Theoretically, if an insurance company goes out of business, its obligations are “spread out” among other similar insurance companies with cheap premium in the state.

However, when an insurance company becomes insolvent, there are coverage limits to the amount for which the guaranty association will reimburse each insured. Usually, this amount is set at a maximum of $100,000 per policy (even if the face value of the policy is higher) and $300,000 per insured (regardless of the number of policies held or their full face value). So don’t count on guaranty funds to bail you out if your insurer fails.