During a stock market crash with the prospects of many companies going out of business, you may wonder what's going to happen to your life insurance company. While your life insurance company may not make it, there are several safeguards in place that mean you'll still be covered in most situations. Keep reading to learn more.
How the Markets Affect Life Insurance Companies
If you're wondering how the markets affect life insurance companies, it's not just because there might be fewer people buying life insurance. Life insurance companies make money not just by adding extra to your premiums but by investing the money they receive in premiums until they must pay it out. The good news is that life insurance companies invest mostly in bonds since those are more predictable and easier to match up against their own liabilities. However, they may have some stock investments, and even bonds can fall during severe market turbulence. That means the life insurance company could be losing money when you need them to pay out.
Safeguard #1: Cash Reserves
The first thing that protects your life insurance is a cash reserve requirement. Insurance companies can't invest all the money they take in. They also need to hold a certain percentage in cash that depends on which state they're in. If the number of claims remains relatively normal, this reserve is enough to pay claims even when the markets are down.
Safeguard #2: Reinsurance
When you buy life insurance, you're rarely buying life insurance from just one company even though that's what it looks like to you. Life insurance companies must buy their own insurance to guarantee that they can pay out claims. This is called reinsurance. Even though you buy one insurance policy, you might have three different insurance companies behind the scenes, so it could take three insurance companies completely failing before you'd lose your entire policy.
Safeguard #3: Guaranty Associations
Insurance companies are also members of guaranty associations. When an insurance company fails, the association steps in and takes over its assets and contracts. The association uses a combination of membership fees collected from the insurance company and stronger cash reserves from other member insurance companies to continue your policy with minimal interruption.
Also Read: How Life Insurance Into Estate Planning