If your insurance company becomes insolvent, the state insurance commissioner (there’s no federal regulator for insurance) will usually try to find another insurance company to buy the failed firm and/or take over its policies.
If the insurance regulator is unable to find a corporate buyer for your policy, the state’s insurance guarantee fund or association may end up administering your policy and providing some backing to your death benefit or cash value. Each state imposes its own limits on how much of your policy value is protected.
If you’re looking for some analogy to such associations, think about the Federal Deposit Insurance Corporation (FDIC) for banking products or the Securities Investor Protection Corporation (SIPC) for brokerage accounts. Each of these entities may provide some protections for your money. Note that there are always limits to these protections, and strict conditions to qualify for them. Don’t assume you are fully covered by any of these.
The NAIC site is a useful resource for insurance rules and regulations. The NAIC describes itself as: “The National Association of Insurance Commissioners (NAIC) is the U.S. standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. Through the NAIC, state insurance regulators establish standards and best practices.” This site can direct you to your state’s insurance commissioner.
Here’s a link to the ACLI website. ACLI is the American Council of Life Insurers. It’s a Washington, D.C.-based trade association. Normally, I wouldn’t direct you to a trade group’s site. In this case, however, I’m making an exception because there’s potentially useful information here on state insurance guaranty associations. These are the organizations that may provide some protections to you in the event your insurance company fails.
According to ACLI, most states provide the following amounts of coverage: