Can an Insurance Company fail like a Bank?


Posted in: Economics, Safe Money

NOLHGAIf you’ve worked with our office for a while you know that we utilize insurance in a lot of the planning that we do. A lot of clients ask us how safe these insurance companies are.

The simple answer is since 1987-2009 there have only been 74 insurance company failures. Compare that to 2010 alone when there were 157 bank failures. There is a big difference in the way that banks and insurance companies are run.

First, it’s very hard to start a “run on an insurance company”  like a “run on a bank.” What most people don’t realize is that when you deposit your money at a bank they can loan that money out up to 9 times. So if you withdraw $100 from a bank that could be $900 of loans they either have to collect or loans they cannot make. An insurance company on the other hand can only loan that money out once. This makes insurance companies a lot less leveraged than a banks.

If it was one of those rare occasions that an insurance company does fail there is not a federal program in place that protects consumers like the FDIC. However, each state does have an insurance guaranty association (GA) that backs up insurance companies. If your insurance company should fail, your policy is usually protected by the GA in your state. As with FDIC insurance, there’s a limit to the amount of insurance protection offered by the GA.

For an excellent resource on the GA we recommend looking at the National Organization of Life & Health Insurance Guaranty Associations (NOLHGA). Their website is www.nolhga.com.

Sources:

National Organization of Life & Health Insurance Guaranty Association
www.nolhga.com

CBS News, February 9, 2012
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