When to Bail on Your Insurer

As if the past nine months haven't been hairy enough for your finances, now your insurance company may be making the headlines. If your insurer is struggling, should you stay or should you bail?

American International Group policyholders have been asking that question since last fall, when AIG got an infusion of funds from the U.S. government. Customers with insurance or annuities from Hartford and Genworth started to worry when those companies' share prices plummeted a few months ago.

Meanwhile, Penn Treaty's long-term-care insurance business has been taken over by state regulators, and Conseco's has been placed in a separate trust because of its financial problems.

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Whether you should ditch your insurer depends on the kind of insurance or annuity you have, how bad the company's financial troubles really are, and what you might give up by switching. In some cases, a failing insurer could tie up your money for months. In the worst case, your claim might not get paid. However, it could cost you a lot more to buy a new policy.

And if someone tries to rush you into making a change, consider the source: "I think agents have an incentive to encourage people to overreact," says Glenn Daily, an independent insurance consultant in New York City. He advises caution when agents try to persuade you to change companies because they get a commission for selling a new policy.

There's a big difference between an insurer's tumbling stock price and its ability to pay claims. Insurance companies are subject to special reserve requirements that state insurance regulators impose to make sure they can pay up. AIG's insurance subsidiaries, for example, are separate from the troubled holding company and still meet regulators' reserve requirements. "The insurance aspects of AIG are sound financially, and the products it's selling are sound," says Thomas E. Hampton, commissioner for the Washington, D.C., Department of Insurance, Securities and Banking.

Although many insurers have been downgraded by the ratings agencies, they're still in good shape (see the box at the bottom of the page). But even when an insurer's ratings are cause for concern, finding a replacement policy may be too expensive -- or even impossible.Stay or go? Here's what's at stake.

Life insurance. People with term policies have the least to worry about. "If you have a policy with no cash value, then your risk is substantially reduced," says Martin Weiss, president of Weiss Research Inc. and founder of a ratings agency known for its tough analysis (now part of TheStreet.com). Even if the insurer becomes insolvent, the state guaranty association will cover up to $300,000 in death benefits (or $500,000 in several states; see www.nolhga.com for links to your state's association). Death benefits historically have been paid promptly and in full.

And if you have an annuity with guaranteed minimum income or withdrawal benefits that are worth more than the current value of your account, you'll lose the value of those benefits if you switch. Bottom line: If the guarantee is worth a lot more than the current value of the account, it usually makes sense to hang on. That's especially true now because "the guarantees from two to three years ago are way better than the guarantees companies are issuing now," says Hampton, the D.C. commissioner.

On the other hand, if you're past the surrender period and your annuity doesn't offer any guarantees, there's much less downside to switching.

Long-term-care insurance. Some long-term-care insurers are in trouble because they priced their policies too low initially. Most of Conseco's policies have been transferred to a state-supervised trust, and Penn Treaty has been taken over by state regulators. But both continue to pay claims. If the insurers became insolvent, state guaranty associations would cover at least $100,000 in long-term-care benefits (half the states cover more).

A bigger problem for people who hold policies with troubled long-term-care insurers is perpetual rate hikes. "Conseco and Penn Treaty will probably have further rate increases," says Claude Thau, a long-term-care insurance consultant.

It can be difficult to replace a long-term-care policy. Insurers have raised rates for new policies across the board to avoid financial problems in the future. Plus, you're older, you may have medical conditions, and you'd have to buy a bigger benefit to keep up with inflation adjustments. If your health is poor, you might not qualify for a new policy at all.

Thau thinks it pays to stay put, even with Penn Treaty and Conseco. "It does make sense to keep these policies in almost every circumstance," he says. "It also makes sense in some cases to supplement the policy," by buying additional long-term-care insurance, if you're still healthy, or by boosting your savings.

If you can't afford the rate increase -- or don't want to pay the insurer more money -- you can save on premiums by lowering the benefit period from lifetime to three or five years, which still covers most claims.