Receivership

Insurance companies can't use the federal Bankruptcy Code. Instead, when an insurer is in serious financial trouble, the insurance commissioner of its home state asks a state court to place it in receivership. The commissioner, or a deputy acting as receiver, then takes control of the company's assets and operations.

Receivership comes in stages. Supervision or conservation is a temporary step to protect assets while regulators investigate. insurer rehabilitation aims to fix the company, often by restructuring, selling blocks of business or finding a merger partner. If that isn't possible, the court orders liquidation, which winds the company down and, if it's found insolvent, triggers coverage from state guaranty associations. Hypothetically, a policyholder in a rehabilitation might see surrenders and loans frozen for months while death claims continue to be paid, sometimes subject to limits.

For most policyholders, the key protections are the receiver's duty to preserve policies and the guaranty association system, which covers policyholders up to limits set by each state. Policies of a failed insurer are often transferred to a healthy company. Keep paying premiums and watch for official notices. See what happens if your life insurance company fails.