What You Need to Know
“There has never been a life insurance claim that has gone unpaid in an insolvency,” said Robert Hartwig, president of the Insurance Information Institute.

There are caps on how much guaranty funds can pay per policyholder, and while that can vary state to state, generally the cap is about $300,000 for property/casualty policies.

Life insurance policyholders are protected for at least $100,000 in cash surrender or withdrawal value on their policies and at least $300,000 in death benefits. Coverage for annuities vary by type of annuity and by state. Fixed annuities are usually capped at about $100,000, but in New York, they are capped at $500,000. Health insurance benefits are normally capped at $100,000.

Most states cap the maximum overall benefit at $300,000 per person, but that varies from state to state.

While the guaranty funds will protect your policy, you should be aware that it might take some time to get all your money back if your insurance companies goes under, said Greg Womack, president of Womack Investment Advisers Inc. in Edmond, Okla. Generally, you’d be able to get just a portion of what you are owed every year until regulators resolved the insolvency.

“Any time you hear of an insurance company failing or being taken over, you are losing flexibility,” Womack said. He said it might make sense at that point to cancel an annuity and risk losing 5% to 10% of the initial investment for an early withdrawal — if it’s worth it to you to maintain flexibility.

Another way to gain some flexibility would be to take out a loan against a life insurance policy. As long as there was enough money left in the policy, it wouldn’t be surrendered. However, you would face interest on the loan, and if you died before you paid the loan off, the face value of the policy would be lower to reflect the loan you took out.

“You have to weigh what your needs are over the near-term. If your money is locked up in a long-term contact, you might want to take some off the table,” Womack said.
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