If the insurance subsidiary DID fail despite the regulatory oversight Chuck mentioned, the backup would be your state’s insurance guarantee fund. There is probably a very wide between the best funded states and the least in this respect. Typically, there is also a limit over which your state fund would not respond, and therefore you might consider spreading your dollars around instead of having all of them in one basket. This is the same concept as for bank deposits, which are eligible for FDIC coverage, but subject to a limit per bank.

There have been cases where an insurance company was near failure and was saved by a fire sale to a competitor. Life insurance companies stand to lose billions if there is a failure and a resulting crisis of confidence and therefore they will typically take bold steps to prevent a failure of a competitor that would result in a PR catastrophe for the entire industry.

The difficult question is whether you are better off with a company that is “too big to fail” and may get federal help, or one that is smaller and more easily acquired by competitors. Even the federal govt has it’s limits and is now under immense pressure to stop all these bailouts and let capitalistic destructive forces work their will as was done with Lehman Bros.

While the current crisis has exposed failures of rating organizations, it still is a good idea to review the various ratings of any insurance company you wish to consider. While these ratings could change after your decision has been made and your money transferred to the company, it is still better to at least make an effort to start with a financially strong company.

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