An insurance company, let’s call it ABC Life, is structured just as other businesses are. If they do not make enough money, they might be forced to declare bankruptcy, just like any other business. The big question that this poses is this: what happens to their customers’ policies? Especially when it comes to annuities, people want to know that their money will not be lost.
Your money will not ever be lost as there are many safeguards put in place to protect clients of insurance companies. In the event that an insurance company goes bankrupt, there are a few things that happen. Each insurance company licensed within a state must be a registered member of the state’s guaranty association. Every so often, this organization is given the task of evaluating an individual company’s solvency. If there are any perceived problems with a company, this solvency check is designed to spot them early and fix them before they become major.
If ABC Life does go under, the state’s guaranty association will protect your investment with a pool of funds that comes from what each insurance company must contribute in order to do business within that state. So if ABC Life goes bankrupt in New York, there will be a pool of money that each licensed insurance company within New York has added to. The size of the contribution to the fun depends upon the amount of business that company does. The policies will be paid out with money from the guaranty fund.
Insurance companies do not just keep the money they are given in a locked up safe. Instead, they invest it in holding companies. This is how they are able to grow your annuity money over time. This is a two pronged approach. The first prong consists of the insurance company’s portfolio of investments. The second is the insurance company’s affiliations. Many insurance companies are nationwide organizations, but because each state has different insurance laws, they might not be a direct branch but rather a looser affiliate of the insurance company. Take a look at your local life insurance brokers. Many are independent entities, but still are able to sell you a policy by a major company. This way, the parent company has fewer expenses, yet is still able to see a small cut of the profit when a policy is sold.
Reinsurance is another safety measure. In its simplest terms, reinsurance is the insurance policy that the company takes out in order to protect your investment with them.
With these safety measures in place for each state, it is impossible that your money will just disappear. This is true even if your company does go under thanks to the above reasons.