Can a Life Insurance Company Declare Bankruptcy?

In the early 1980s, the worry of a life insurance company declaring bankruptcy or going insolvent was a rarity, which quickly changed during the 1990s when some well-known insurance companies were placed into receivership.

Because insurance companies are regulated by the states, federal bankruptcy law is not applicable to insurance receivership proceedings.

In fact, insurance companies cannot declare bankruptcy; instead, they are placed into insolvency receivership or liquidation by the state’s insurance department.

State liquidation courts then rule on the many complex issues involved in insurance company insolvency, including what becomes of the insurance policies and cash values.

Oftentimes, other insurers can buy these policies with the death benefits remaining the same, but this may involve a lowering of cash values and/or an increase in premiums.

Insurance companies are regulated by individual states, and it is ultimately the responsibility of the states to safeguard the solvency of insurers licensed to do business in their state.

When states determine that an insurer is insolvent, the mechanism used to protect policyholders is the guaranty association system. All 50 states, the District of Columbia, and Puerto Rico has guaranty associations to which licensed life and health insurers must belong.

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The best resource for information on this issue can be found on the National Organization of Life and Health Insurance Guaranty Association’s website (NOLHGA) – a voluntary association. The following information can be found on their website.

When insolvency involves multiple states, NOLHGA assists its state guaranty association members in quickly and cost-effectively fulfilling their statutory obligations to policyholders.

NOLHGA was founded in 1983 after the state guaranty associations determined that there was a need for a coordinating mechanism to assist affected guaranty associations in efficiently meeting their statutory obligations in the face of the often-complex issues resulting from the insolvency of an insurer licensed to business in multiple states.

State guaranty associations provide coverage, up to certain statutory limits, for resident policyholders of insolvent member insurers.

When an insurer licensed in multiple states is declared insolvent, NOLHGA, on behalf of affect member state guaranty associations, assembles a task force of guaranty association officials.

This task force – with the support of the NOLHGA staff, legal experts, actuaries and financial experts – develops a plan for meeting member association obligations.

Typically, the task force analyzes the company’s commitments; ensures the covered claims are paid; and, when appropriate, arranges for covered policies to be transferred to a healthy insurer.

Also, the task force supports the efforts of the receiver to dispose of the company’s assets in a way that maximizes their value.

When there is a shortfall of estate assets needed to fulfill all of the covered policyholder obligations of the insolvent insurer, guaranty associations assess the licensed insurers in their states a proportional share of the funds needed.

At all steps in the process, the affected state guaranty association, working together with the NOLHGA, cooperate with the receiver and other interested parties to build consensus on the steps needed to resolve an insolvency equitably and efficiently.

There are several key benefits that the state guaranty associations seeks to achieve by working together through NOLHGA.

The first is to decrease costs to the member insurers that fund state guaranty associations. Rather than hiring it own legal and financial excerpt, the associations work together through NOLHGA and use one team of experts, significantly reducing cost to guaranty associations.

This coordination of effort also helps reduce the length of time a receiver may require to develop a plan of rehabilitation or otherwise resolve a multi-state insolvency.

Since its creation in 1983, NOLHGA has assisted its member guaranty association in guarantying more than $20.2 billion into coverage benefits for policyholders and annuitants of insolvent companies.

Tony Steuer is an author and advocate for financial preparedness. Tony Steuer, CLU, LA, CPFFE, helps people make sense of the financial world in a way that’s easy for them to understand. His books including, “GET READY!,” “Insurance Made Easy,” and “Questions and Answers on Life Insurance,” have won numerous awards. Tony is the founder of the GET READY! Initiative which includes the GET READY! financial organization system, the GET READY! Financial Preparedness Club, GET READY! Podcast, and the GET READY! Financial Principles, a best practices playbook for the financial services industry. Tony served as long-term member of the California Department of Insurance Curriculum Board. Tony is regularly featured in the media including the New York Times, the Washington Post, Fast Company, and other media. He has also appeared as a guest on television shows, such as ABC’s “Seven on Your Side.” Visit to join the GET READY! Financial Preparedness Club and access free resources.

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