Guides Liquidation

Liquidation | Life Insurance Glossary

One question that should be on a person�s mind when he or she takes out a life insurance policy that could insure them over decades is, �What happens to my policy and benefits if the insurance company goes out of business?� There are safeguards in place to help secure your benefits should your insurer become unable to continue to guarantee your benefits. When a company is failing, state insurance department has several options to help maintain benefits for policyholders. It can prohibit the company from renewing policies that are not guaranteed to be renewable; it can prevent or limit the company from selling any new policies; it can label the insurer as insolvent and ask a Superior Court to allow the state to liquidate the company�s assets in order to compensate policy owners and creditors.

This last option is called liquidation. If the state insurance department takes over company operations with the idea of trying to see if the company can be saved, it is called conservation. A company that is in either conservation or liquidation is called an �estate.� If the court decides to allow the state to liquidate an insurance company�s assets, the state does exactly that: it sells of company office equipment, properties, et al. The proceeds are used to help pay policyholder claims. Each state also has an association that helps pay out policyholder claims after an insurance company is liquidated. These associations are often called guarantee associations. They usually operate on monies donated by group members � other insurance companies. Please keep in mind that, while there are measures to help protect policyholders, rarely do payouts under liquidation cover 100 percent of the face value of the life insurance policy.