What Happens if My Life Insurance Company Goes Bankrupt?

Welcome to our blog post where we discuss the topic of life insurance company bankruptcy and its impact on policyholders. This guide is designed to help you understand the safeguards in place like Assuris, and explore effective strategies for risk management. Whether you’re evaluating the stability of your insurance provider or seeking ways to secure your policy, our insights will provide you with the essential knowledge to make informed decisions.

In this article:

• Understanding the Impact of Life Insurance Company Bankruptcy
• What Happens to My Policy if My Life Insurance Company Goes Bankrupt?
• How Does Assuris Shield Canadian Policyholders?
• What Are the Limits of Assuris’ Protection?
• Case Study: How Assuris’s Protection Works in Event of Bankruptcy
• What Are the Best Life Insurance Risk Management Strategies, and How Should Policyholders Weigh Their Pros and Cons?
• Frequently Asked Questions (FAQs) about Life Insurance and Company Solvency

Understanding the Impact of Life Insurance Company Bankruptcy

When a life insurance company declares bankruptcy, the primary concern for policyholders is whether their policies will remain valid and if their beneficiaries will still receive the promised benefits. The uncertainty can cause significant anxiety among policyholders. Financial failure can occur to even the most respectable insurance organizations. In the past, three insurance firms in Canada have filed for bankruptcy: Les Coopérants in 1992, Sovereign Life in 1993, and Confederation Life in 1994. 

Such instances highlight the unpredictable nature of the insurance sector and underscore the importance of protective measures for policyholders. In response to these bankruptcies, Canada established robust systems to safeguard policyholders, primarily through the establishment of Assuris. This organization plays a critical role in ensuring that, even in the event of an insurer’s financial collapse, the impact on policyholders is minimized. Assuris guarantees that a significant portion of the policy’s benefits are protected, although there are caps and conditions to this protection. For instance, in the event of a company’s failure, Assuris ensures that for life insurance, death benefits are covered up to a certain limit, and similar protections are in place for other types of insurance benefits like critical illness or long-term care.

Moreover, these past bankruptcies have prompted a more vigilant regulatory environment in the Canadian insurance industry, leading to stricter financial stability requirements for insurance companies. This heightened regulation aims to prevent future bankruptcies and protect the interests of policyholders.

What Happens to My Policy if My Life Insurance Company Goes Bankrupt?

If your life insurance company goes bankrupt, several protective measures are typically in place to safeguard your policy, here’s what generally happens:

1. Intervention by a Guarantee Association: In Canada, Assuris is the organization that steps in when a life insurance company declares bankruptcy. It’s designed to protect policyholders by ensuring they continue to receive most, if not all, of their insurance benefits.
2. Protection of Policy Benefits: Assuris offers protection to policyholders up to certain limits. For example, for life insurance death benefits, they offer protection up to a new limit (as of 2023) of $1 million or 90% of the promised benefit, whichever is higher. There are similar protections for other types of benefits like cash values, critical illness benefits, and disability insurance.
3. Transfer of Policies: Often, your policy will be transferred to a financially stable insurance company. Assuris coordinates this transfer to ensure continuity. The terms of your policy might change slightly under the new insurer, and there may be adjustments in premiums or benefits, but the aim is to keep these changes minimal.
4. Continuity of Coverage: Throughout the process, the goal is to maintain continuous coverage so that there is no period where you are without life insurance protection. However, you should be vigilant and stay informed about any changes or actions you might need to take during the transition.
5. Potential for Delays or Changes: During the transition time, be ready for any delays in the processing of claims or changes in the way that premiums are handled. It’s critical to be aware of any updates from Assuris or the new insurance provider.
6. Stay Informed and Engage with New Insurer: If your policy is transferred to a new company, it’s important to establish communication with them. Understand the new terms, if any, and clarify how your policy will be managed moving forward.

How Does Assuris Shield Canadian Policyholders?

Assuris, established in Canada as a non-profit organization, serves a role in shielding policyholders against the insolvency of their life insurance providers. Its mission is to maintain a safety net for Canadians who have placed their trust in life insurance companies. When an insurance company faces financial failure, Assuris intervenes to ensure that policyholders continue to receive the benefits of their insurance policies. This protection is not limitless but is designed to cover a substantial portion of the policyholder’s benefits. For instance, Assuris guarantees that life insurance death benefits are protected up to a specified limit, reflecting a balance between comprehensive coverage and practical limits of protection.

Assuris’s approach involves several key steps. In the event of a company’s bankruptcy, Assuris works to transfer the policies to a solvent insurance company, striving to ensure a seamless transition with minimal disruption to the policyholders. While some changes in policy terms or premiums may occur, these are typically kept to a minimum. The organization’s operations are funded by the life insurance industry itself, with member companies contributing to a fund designed to support these protective measures.

The establishment of Assuris reflects a proactive approach by the Canadian insurance industry to self-regulate and provide a layer of security for consumers. Its presence offers peace of mind to policyholders, knowing that there is a system in place to protect them in the rare event of their insurer’s insolvency. Assuris embodies a commitment to maintaining the integrity and trust in the Canadian life insurance market, ensuring that policyholders’ interests are safeguarded during times of financial uncertainty in the insurance sector.

What Are the Limits of Assuris’ Protection?

Assuris offers critical protection to Canadian policyholders, but it’s important to understand that this protection comes with specific limits. These coverage limits are designed to ensure substantial protection for policyholders while maintaining the sustainability of the protection fund.

1. Life Insurance Death Benefits: For life insurance policies, Assuris guarantees that if your insurance company fails, it will cover up to $1 million or 90% of the promised death benefit, whichever is higher. This means if your policy’s death benefit is $500,000, Assuris will protect the entire amount. If the benefit is $2 million, Assuris will cover $1 million.
2. Health Expense Coverage: In the case of health insurance policies, Assuris provides protection up to $250,000 or 90% of the promised health insurance benefits. This is particularly relevant for critical illness or long-term care policies.
3. Monthly Income Benefits: For products like annuities that provide a monthly income, Assuris covers up to $5,000 per month or 90% of the promised monthly income benefit. This is significant for retirees relying on annuity payments.
4. Cash Value and Segregated Fund Guarantees: When it comes to the cash surrender value of life insurance policies or the value of segregated funds, Assuris ensures protection up to $100,000 or 90% of the accumulated value, whichever is higher.
5. Accumulated Value Benefits: For other accumulated value benefits, the coverage is also up to $100,000 or 90% of the promised amount.

These limits are applied per policyholder, per life insurance company, meaning that if you hold multiple policies with different companies, each is covered separately up to these limits. It’s also crucial to understand that these limits apply to the total value of all similar benefits you hold with the same insurer. For example, if you have two life insurance policies with the same company, the total coverage from Assuris will not exceed $1 million or 90% of the combined death benefits.

Case Study: How Assuris’s Protection Works in Event of Bankruptcy

Scenario: Let’s look at the case of Maria Gonzalez, a policyholder with Maple Life Insurance. Maria has a life insurance policy with a death benefit of $800,000 and a critical illness policy with a benefit of $100,000.

Bankruptcy: Maple Life Insurance faces severe financial difficulties and declares bankruptcy. This situation activates Assuris’s protection mechanisms.

Assuris’s Role: Assuris intervenes to safeguard the interests of Maple Life Insurance’s policyholders, including Maria.

Life Insurance Policy Coverage:

• Original Policy: Maria’s life insurance policy has a death benefit of $800,000.
• Assuris’s Protection: Assuris covers up to $1 million or 90% of the promised death benefit, whichever is higher. Therefore, Maria’s entire $800,000 death benefit is fully protected under Assuris’s guidelines.

Critical Illness Policy Coverage:

• Original Policy: Maria’s critical illness policy offers a benefit of $100,000.
• Assuris’s Protection: Since Assuris provides protection up to $250,000 or 90% of the promised amount for critical illness benefits, Maria’s full $100,000 benefit is secured.

Policy Transfer: Assuris arranges for another financially stable life insurance company to assume Maria’s policies, ensuring the continuity of her coverage.

Adjustments in New Policy:

• Policy Terms and Premiums: The transfer may result in slight modifications in the terms or premiums of Maria’s policies, though any changes are generally kept to a minimum. These alterations, if necessary, are communicated to Maria for her review and agreement.

Outcome:

• Maria retains her life insurance coverage with an $800,000 death benefit and a critical illness policy valued at $100,000, despite her original insurer’s bankruptcy.
• She experiences little to no disruption in her coverage and enjoys the reassurance that her insurance benefits remain intact.

What Are the Best Life Insurance Risk Management Strategies, and How Should Policyholders Weigh Their Pros and Cons?

The key strategy for managing risk in life insurance is diversification. By distributing policies across multiple insurance companies, policyholders can mitigate the risk associated with any single company’s potential financial difficulties or bankruptcy. This approach ensures that if one insurer faces issues, the policyholder’s overall coverage isn’t entirely compromised. 

However, diversifying policies also involves trade-offs. Managing relationships with multiple insurers can be complex, and different companies may have varying fee structures and policy terms. This can lead to an increase in administrative effort and possibly higher costs due to the lack of volume discounts that might be available with a single insurer.

When selecting policies, it’s important to balance coverage needs with cost considerations. Policyholders should assess the stability and reputation of different insurers, examining each company’s financial strength and customer service record. They should also consider their specific insurance needs, whether it’s life, health, or disability coverage, and select a mix of policies that provides comprehensive protection without unnecessary overlap or excessive premiums. 

Consulting with a knowledgeable insurance broker or financial advisor can provide valuable insights and help tailor a diversified insurance portfolio that aligns with the policyholder’s financial goals and risk tolerance. These professionals offer access to a wide range of insurance products and have the expertise to compare and recommend the best policies for your unique situation. They can navigate the complexities of insurance policies, ensuring you understand the terms and conditions, and help in managing risks by assessing your individual needs. Additionally, as your life circumstances change, they provide valuable guidance in adjusting your coverage to avoid underinsurance or overpaying. Moreover, in case of a claim, having an advisor can streamline the process, acting as a personal advocate to ensure you receive the benefits you’re entitled to. Their role extends beyond just policy selection, offering a long-term relationship for continuous support and advice, keeping your insurance strategy effective and up-to-date with your evolving life stages.

Frequently Asked Questions (FAQs) about Life Insurance and Company Solvency

Find a solution for what you’re looking for 

Staying informed about the solvency of your life insurance provider and understanding the protective measures in place,  are key to ensuring long-term security and peace of mind for your insurance investments. At Protect Your Wealth, we work with and compare policies and quotes from the best life insurance companies in Canada to ensure the best solution for you and your needs. We provide expert life insurance solutions, including no medical life insurance, critical illness insurance, term life insurance, and permanent life insurance to build the best package to give you the protection you need. 

Contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today! We’re proudly based out of Hamilton, and service clients anywhere in Ontario, British Columbia, and Alberta including areas such as Oakville, Grande Prairie, and Kamloops.