Protecting life insurance

The last issue of Fortune ran a blurb on what happens to your life insurance policy if your insurer goes bankrupt. (Unfortunately, the story is not available online.) In the event of an insurer's bankruptcy, the guaranty association for the state in which the insurer is located takes over the failed insurer and either pays the claims or transfers policies to a solvent insurer.

Since insurance is regulated by the states, the amount insured varies, but the story states most benefits are capped at $300,000. The National Organization of Life and Health Insurance Guaranty Associations has more information. As an example, in 2004, when a Pennsylvania insurer went bankrupt, the state guaranty association transferred most policies to stable Pennsylvania insurers.

The story also notes that in the case of AIG, it's the parent company and not the life insurance subsidiary that is experiencing problems. It might be a good idea to check on your insurers corporate structure to know what your insolvency risk could be.