How safe is your insurance company?


Earlier this year we warned of the dangers of consumers cashing out life insurance policies to live on as their portfolios, homes and other assets drop. (see Life Settlements - the next subprime headline?)

When the twin towers crashed again this year in New York (Lehman and AIG) and with Morgan and Goldman abandoning investment bank status, one has to wonder is anything safe?

Rumors of Lehman's failure were in the news prior to the collapse, but so was a fair amount of spin which essentially tarred and feathered anyone who claimed that "the emperor had no pajamas." Rating agencies were under pressure to not rock the boat.

There is a fine line between fear mongering and asking intelligent questions, but if the largest financial institutions have been shown to be at risk, why wouldn't you at least check on your life carrier? What would happen if they would fail?

Generally, if any regulated insurer could not pay its claims, the regulator in the company's home state - usually the state insurance commissioner - would start a process known as rehabilitation. If rehab fails, the company is liquidated and claims would be paid, up to a certain limit, by a guaranty agency in each policyholder's state. This money comes from companies still doing business in each state.

In the case of life or annuity policies, state regulators usually try to transfer in-force policies to a new company. They also transfer the failed company's assets and enough money from the guaranty fund to make sure the new company can pay the failed company's claims, at least up to the guaranty-agency limits. The new companies can't change policies' terms. However, they can often raise premiums or fees or make other changes to the extent allowed in the original contract. Customers can stay with the new companies or cancel their policies.

So as long as you have faith and confidence in your government, you have nothing to worry about. (rim shot)

On the other hand, if you prefer to control your own destiny and not leave it up to someone else to solve for you, you may want to see if your carrier has developed pimples since you purchased the policy.

In this unprecedented financial environment, consumers should check the health of their insurance company. If it is low-rated, or if the rating has dropped since you purchased your policy, you may consider switching. Companies such as A.M. Best rate insurance companies. You can also check them out at www.naic.org (click on Consumer Information Source), although it can be challenging because insurers go by so many different names. You shouldn't conclude that just because a company is highly rated it's not at risk. This is an exceptionally fluid market we have now. The usual diversification logic that investors use for their portfolios should also be applied to insurance. If you have a single policy death benefit, a multimillion-dollar policy, it would be prudent to have that coverage across several companies rather than just one. As always, an informed consumer is going to fare better than an uninformed one. When considering a cash surrender of an existing policy, it is usually worthwhile to evaluate your options from a qualified life settlement broker.

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