The very low risk of insurance company bankruptcy
By Jim Poolman
When purchasing a financial product, one of the most important aspects to consider is the financial strength of the company from which you purchase the product. Insurance companies often have a leg up on this regard.
As Steve Varnon notes in his recent CBS MoneyWatch article, unlike bank bankruptcies, there have been very few instances of insurance company bankruptcies. That’s because insurance companies are highly regulated and very conservatively managed. And, as Varnon rightly notes, in the few instances of insurance company insolvencies, benefits have been protected by the state guaranty association, or another insurance company has stepped in and taken over the policies. As a result, there have been very few instances where policyholders have lost money when an insurance company goes bankrupt. A recent report by Joe Tomlinson, an actuary and a financial planner, provides further details regarding the low risk of insurance company bankruptcies.
According to Tomlinson, here’s what you need to know regarding the low risk of insurance company insolvencies:
- Historically, there is a low risk of insurance company insolvencies, with the number of failed companies being few and insurance businesses that are in trouble being sold to bigger, more stable companies.
- Guaranty associations exist on a state level to back up the contract guarantees in annuity policies in the case that an insurance company is unable to do so. These guarantees include the minimum interest guarantees in other types of fixed annuities, including fixed-index annuities.
- The National Organization of Life and Health Insurance Guaranty Associations serves as a coordinating body among all state guaranty associations and also acts to coordinate the rescue of policyholders when failed insurers extend across multiple states.
Finally, you need look no further than some recent research of current indexed annuity clients to learn that they have done their homework. More than two-thirds (68%) of consumers who purchased an indexed annuity cited the financial strength of the company as very important when deciding to make this purchase.