Question

assume you work for TTW Company and you have disability insurance of 75% of your annual salary of $50,000 with CCC Insurance Inc. You have a life insurance policy of 3.6 times your salary with CCC Insurance Inc. paid by the employer. You also have insurance policies of $85,000 in your name, $50,000 in your spouse's name, and $15,000 each in your three children's names with CCC Insurance Inc. TTW's health and dental plans, with a life-time payout of $100,000 for each membet of the insured's family, is also with CCC Insurance Inc. You have $100,000 in RRSPs and $40,000 in mutual funds with CCC Insurance Ltd.

Required:

If the insurance company becomes bankrupt, how secure is your insurance coverage and your investments?

Answer 1

Generally, it is an uncommon incident that an Insurance company may fail or become bankrupt; even in financial distress it is helped through rehabilitation process. But, still there is a chance that an insurance company can become bankrupt.

According to the given scenario, it can be easily assumed that the person has almost all of his/her insurance with a single insurance company which is CCW Insurance Limited. Though dealing with only one insurance company sounds risky, but practically the risk is very low.

Now, as, Registered Retirement Savings Plan (RRSP) is a retirement plan provided by the Canadian government and also some citizen of USA are a holder of it; we will consider two different scenarios from the perspective of Canada and the USA.

Citizen of the USA:

Life, Health (dental included) and Disability insurance: In case this insurance company becomes bankrupt; National Organization of Life and Health Insurance Guarantee Associations, which includes fifty states with their individual insurance guarantee associations, will be responsible to continue the insurance coverage and cover the policy claims.

Registered Retirement Savings Plan (RRSP): In case this insurance company becomes bankrupt; Assuris, which is a non-profit organization under the government of Canada, will protect the accumulated annuities and the segregated fund policies under Registered Retirement Savings Plan (RRSP).

Mutual Fund: Generally, whenever a person invests in mutual funds the fund amount is segregated into different types of securities and is held in different custodial accounts which are managed by either a bank or a trust. In case this insurance company becomes bankrupt; it won't hamper the investment funds, as the person is the legal owner of his/her shares in the mutual fund.

Citizen of Canada:

Life, Health (dental included), Disability insurance and Registered Retirement Savings Plan (RRSP): In case this insurance company becomes bankrupt; Assuris, is the sole organization that provides coverage for all these financial products. It is a non-profit organization under the government of Canada, who will transfer the policies to another solvent company in case the insurance company fails. For insurance products, Assuris guarantees to cover 85% of the insurance benefits to the policy holder and in case of RRSP, it guarantees to pay 100% of the accumulated value up to the limit of one hundred thousand CAD.

Mutual Fund: In case this insurance company becomes bankrupt; Mutual Fund Dealers Association (MFDA) of Canada, protects the mutual funds through MFDA Investor Protection Corporation. Only if the insurance company proving the mutual fund is a member of MFDA, then in case of insolvency, the fund holders are protected by it.