Question: What happens if my life insurance company files for bankruptcy?
Answer :

Your insurance protection isn't dead in the water just because the company that wrote the policy is. With a few exceptions, the individual states have you at least partially covered through what's known as a guaranty fund or guaranty association. Through a process similar to Federal Deposit Insurance Corporation coverage of bank failures, these associations cover insurance company insolvencies. Although the amount of coverage that an association typically covers depends in part on how deep the association's pockets are, it typically covers auto, home, and life insurance policies up to a $300,000 limit--sufficient to satisfy all but the largest of claims.

What happens next? In most cases, your state's insurance department arranges to have another company take up the policies of the company that's going bankrupt. When that happens, you'll still have your death benefit coverage, though you may lose some of the other benefits you anticipated, such as the projected earnings on cash value life insurance.

All you need to do now is watch the mail. When your defunct insurance company enters receivership, you may also be contacted by the insurance company's receiver, which is, or is appointed by, the state insurance department. You'll be informed what you need to do to transfer your insurance coverage to another company, and you'll be supplied with all the necessary forms. If by some chance you aren't contacted once the insurance company enters insolvency, then you should call the state insurance department.

Of course, you can always decide to purchase a new life insurance policy with some other company. If you're going to do this, do a little homework to assure yourself that history won't repeat itself any time soon. Although any company can go bankrupt, it's less likely to happen to one that's in good financial shape. Several independent rating services, such as Standard& Poor's, A. M. Best, and Moody's, can provide you with insurance company rating information. You (or your financial professional) can get this information from the rating service's website or your local library, or by calling the insurance company's customer service representative.