Buying life insurance is an act of faith. When you die in 30 or 40 or 50 years you expect some young kid, not yet born, to process your claim and send your family a check.
In general, that is been a good bet. But several insurers failed in the 1980s, including some big ones. What would happen if yours failed next?
Your policies might be bought by another insurance company. Your death benefit would be safe, but your premiums could rise, you might lose some cash value, those cash values might not accumulate as fast as they did before, and it might be years before you could draw them out without penalty.
If no other insurer buys your policy, you are protected in whole or in part by a state guaranty fund. It normally (but not always) pays death claims immediately and continues to make full payments to people currently receiving monthly annuity payments.
Not all state pays the same amount, however, and no state covers large claims. In general, the guaranty funds cap payments on individual policies at $100,000 for cash values or annuities, $300,000 for death benefits, and $300,000 for all claims combined. In major bankruptcy, even these claims may not be paid right away because the guaranty funds do not have enough money. Your cash value could be frozen and some claims not paid, while the industry arranges a bailout. Dividends may be slashed or eliminated.
The policy’s internal expenses may soar.
Not all guaranty funds cover the same things. They have different rules for covering out of state policyholders; different rules about people who move to the state and hold policies from companies not licensed there; different rules for annuitants; different rules about covering guaranteed investment contracts held in company retirement plans. How well you are protected depends on where you live.
Even if your insurance company does not fail, a weak balance sheet could mean lower dividends and skimpier cash values in the years ahead. Cash value investors might not get the returns they expected. Term policy buyers might have to pay more for their coverage.
So buy only from a company with good quality ratings from at least three of the five insurance rating companies and no mediocre ratings. Almost every insurer will have a rating from A.M. Best, Standard & Poor’s, Duff & Phelps. In general A.M. Best is considered the easiest marker, followed by Duff & Phelps, then Standard & Poor’s, then Moody’s, then Weiss.
In general, that is been a good bet. But several insurers failed in the 1980s, including some big ones. What would happen if yours failed next?
Your policies might be bought by another insurance company. Your death benefit would be safe, but your premiums could rise, you might lose some cash value, those cash values might not accumulate as fast as they did before, and it might be years before you could draw them out without penalty.
If no other insurer buys your policy, you are protected in whole or in part by a state guaranty fund. It normally (but not always) pays death claims immediately and continues to make full payments to people currently receiving monthly annuity payments.
Not all state pays the same amount, however, and no state covers large claims. In general, the guaranty funds cap payments on individual policies at $100,000 for cash values or annuities, $300,000 for death benefits, and $300,000 for all claims combined. In major bankruptcy, even these claims may not be paid right away because the guaranty funds do not have enough money. Your cash value could be frozen and some claims not paid, while the industry arranges a bailout. Dividends may be slashed or eliminated.
The policy’s internal expenses may soar.
Not all guaranty funds cover the same things. They have different rules for covering out of state policyholders; different rules about people who move to the state and hold policies from companies not licensed there; different rules for annuitants; different rules about covering guaranteed investment contracts held in company retirement plans. How well you are protected depends on where you live.
Even if your insurance company does not fail, a weak balance sheet could mean lower dividends and skimpier cash values in the years ahead. Cash value investors might not get the returns they expected. Term policy buyers might have to pay more for their coverage.
So buy only from a company with good quality ratings from at least three of the five insurance rating companies and no mediocre ratings. Almost every insurer will have a rating from A.M. Best, Standard & Poor’s, Duff & Phelps. In general A.M. Best is considered the easiest marker, followed by Duff & Phelps, then Standard & Poor’s, then Moody’s, then Weiss.