When taking out a life insurance policy, not many people think about what will happen if the provider goes bust, but it is a question worth considering. Although insurance providers are more heavily regulated than other commercial ventures, they can fail.
What happens if a life insurance goes bankrupt in Canada? Will you lose life insurance protection and have to buy a new policy, which, in the best-case scenario will be costlier than your previous plan, and in the worst case, may be out of your reach?
In case your insurer goes belly up, Assuris will come to your rescue. Assuris is a nonprofit organization that protects policyholders in Canada if their insurance company becomes insolvent.
Why do insurance companies go out of business?
Even though insurance companies are strictly regulated, they can fail for a number of reasons. For instance, unfavorable market conditions and significantly higher than expected claims may push an insurance company into insolvency. That said, insurance carriers failing in Canada is a rare occurrence. Since 1990, only three have failed — Les Cooperants (1992), Sovereign Life (1993), and Confederation Life (1994). All the same, for policyholders even a single failure is one too many. Therefore, before you sign an insurance contract, do check the financial health of the provider.
Am I protected if my insurance company goes out of business?
Yes, you are protected if your insurance provider becomes insolvent. Assuris and OSFI are part of Canada’s two-pronged approach to safeguard the best interests of policyholders. While OSFI supervises insurance companies to prevent them from failing, Assuris compensates policyholders if their provider goes bankrupt.
Let us look at how both Assuris and OFSI protect policyholders’ interests.
Assuris – What is it and how does it work?
Formed in 1990, Assuris is a nonprofit, industry-funded organization that protects Canadian policyholders in the unlikely event of their insurance company failing. Because Assuris is funded by the insurance industry and works on a not-for-profit basis, you do not have to pay any extra money to enjoy its protection. All citizens or permanent residents of Canada who purchase an insurance product from a Canadian insurer are automatically protected by Assuris. All life providers that sell insurance products in Canada are required by law to be a member of Assuris. Moreover, they cannot cancel their membership as long as they do business in Canada.
If your insurance company fails, Assuris will try to transfer the policy to a solvent life insurance company. Assuris guarantees you will retain at least 85% of your insurance benefits.
Specifically, Assuris guarantees:
- You will retain 100% of the death benefit if it is $200,000 or less and 85% of the death benefit if it is more than $200,000. For example, if you have a term or a permanent life plan with a death benefit of $300,000, Assuris will transfer it to a financially-stable insurer and you will retain $255,000.
- You will get $60,000 of the cash value or 85% of the cash value, whichever is less. If the cash value is $60,000 or less, you will retain the full amount. On the other hand, if your original policy’s cash value is more than $60,000, you will get 85% of it. For example, let us say your original policy has accumulated $90,000 in cash value. In this case, you will get 85% — that is, $76,500. Keep in mind if you had taken a policy loan against the cash value and had not repaid it in full, Assuris protection will apply to the net cash value. For example, say your policy’s total cash value is $80,000 and you have taken a loan of $40,000. As a result, your policy’s net cash value is $40,000. Since it is less than $60,000, you will be able to retain all of it.
- You will get $60,000 of the health benefit or 85% of the health benefit whichever is less. If your health policy has a payout of $60,000 or less, you will retain all of it. If the health benefit exceeds $60,000, you will get 85% of it.
- You will get $2,000 of the monthly benefit or 85% of the monthly benefit, whichever is less. If your disability insurance policy has a monthly payout of $2,000 or less, you will retain all of it. If the monthly payout exceeds $2,000, you’ll get 85% of the promised benefit.
OSFI is an independent agency of the government that supervises and regulates insurance companies and other financial institutions. OSFI, unlike Assuris, does not guarantee your promised benefits, nor will it bail out an insurance company that goes bankrupt. Instead, it protects the interests of policyholders by enforcing laws that ensure insurers maintain sufficient capital and assets. It also conducts reviews of insurance companies to assess their financial health. In short, OSFI provides a framework for insurers to reduce their risk of insolvency.
Tips to avoid life insurance companies that might become bankrupt
Before you sign up for a policy, it is important to research the insurer to avoid having to rely on Assuris’ protection later on.
Here are some tips that help you pick a financially stable life insurance company:
Look at A.M. Best Ratings
There are several independent agencies that rate insurance companies on their financial strength, but A.M. Best is the most respected. It has a long history of rating financial companies, including insurance carriers, and looks at both current financial indicators and long-term financial outlook while assessing a company’s financial health.
A.M. Best provides a simple scoring formula, ranging from A++ to D. A high rating (A, A+, or A++) is given to companies which are in a great position to fulfill all their financial commitments. A low rating, in contrast, indicates that an insurer has a low ability to meet its long-term obligations.
You can visit the A.M. Best website to check the rating for your insurer. You can also find the same information on your provider’s website. If A.M. Best lowers the financial rating for your provider after you have purchased a policy, depending on their reasoning for downgrading it, you might want to consider switching insurers.
Go with a bigger, more experienced name
While every Canadian insurer is reasonably financially sound, thanks to strict federal regulations, big companies with a long history of selling insurance products are likely to be more financially stable. Many top Canadian insurance companies also enjoy favorable ratings from A.M. Best and other independent rating agencies.
Work with more than one insurance provider
Splitting your life insurance needs is another option to reduce the risk of losing benefits when an insurance company goes bust. For instance, let us say you want to take out a $600,000 life insurance policy. Instead of purchasing one policy, you can buy two policies, each having a death benefit of $300,000.
When should I change insurance companies?
If your insurance company’s financial ratings are low, you may want to consider switching insurers. However, remember that a new policy will have higher premiums than the previous one. That is because the cost of life insurance goes up with age. Also, if you have developed one or more new health conditions, the increase is likely to be significant. Worse, you may not get approved for a medically underwritten life policy.
If you are concerned about your provider’s financial health, consider speaking to an experienced life insurance agent. He or she can recommend the best course of action, depending on how bad your insurer’s financial ratings are, and the type of policy you have. If you do decide to switch providers, do not cease your existing coverage until you have been approved for a new policy.
Life insurance companies in Canada are strictly regulated by the government. Even so, an insurance company can fail. You can avoid working with insurance companies that might go bust by checking their financial ratings before taking out a policy. In the unlikely event of your provider going bankrupt, Assuris will come to your aid. It ensures you will retain at least 85% of the promised benefits. If you are looking for a new life insurance policy, Dundas Life can help you secure affordable rates with top providers.
Frequently Asked Questions
What happens if a life insurance company goes bankrupt in Canada?
Assuris will come to your aid if your insurance provider becomes insolvent. It provides 100% protection when insurance benefits are below certain dollar values and 85% protection otherwise.
Why do life insurance companies fail?
Insurance providers can face bankruptcy for various reasons, including alleged fraud and receiving too many claims because of a catastrophic event.
How can you mitigate your risk of working with an insurance company that might fail?
Always check an insurer’s financial ratings before signing up for a policy with them. There are many independent rating agencies, such as A.M. Best, that can give you valuable insight into a company’s financial health. Also, if you are concerned about the possibility of your insurer going bankrupt, it may be a good idea to work with a big company with a long and solid track record. Another option is to work with multiple insurers instead of buying a large policy from one provider.