What if your Insurance Company goes bankrupt?

Whenever we try to buy an insurance product from a private insurer, then all of us have a huge concern like “What if my insurance company goes bankrupt in India?”. Because since long we believe in LIC and not in private insurers. Let us see this what IF.

Insurance companies Bankrupt


There is a huge crowd of LIC agents or believers who strongly propagate the idea that LIC is SECURE. Because it is backed by the Government of India. Therefore, no cause of any such default or bankruptcy. Hence, if we want to invest in any insurance product then it must be with LIC only.

However, there are some other people, who propagate the idea that private insurance companies are as safe as LIC. So whom to believe?

Let us see some rules and regulations attached to regulating insurance companies in India.

Who can start Insurance business in India?

It is not you or I can start a business by registering the company. The company needs IRDA approval. However, there are some strict rules attached to it and will be monitored by IRDA. The company must have proven track record of at least 5 years with profit in each quarter of a financial year. Capital required to start a business is Rs.100 Cr. IRDA can suspend the license of a company in case it found to be-

  • If company acted in a prejudicial manner to any particular customer.
  • Fails to furnish information requested by IRDA.
  • Does not provide periodical returns.
  • Does not co-operative with IRDA during the time of inquiry.
  • Indulge in manipulating the insurance business.
  • Fails to make investments in social and infrastructure as specified under insurance act.
  • If the central Government demands of cancellation.
  • If the insurer default to insure.

What is the solvency margin of an insurance company?

It is nothing but a cash reserve the insurer has to keep in order to pay the claims during an emergency. IRDA requires the insurance companies to maintain a particular level of solvency margin for their smooth functioning. In other words, it is a size of capital relative to the risk it has. If an insurance company insured Rs.1, 000, then they have to keep aside Rs.1, 500 with IRDA as a solvency margin.

Let us say due to earthquake or any unforeseen accidents, an insurance company faced the huge cash requirement to settle the claim. In such situation, this solvency margin is utilized for any such emergencies of company need. As per IRDA rule, this solvency margin must be 150%. Higher the solvency margin indicates company better equipped to pay off its debt and can sustain in the long run.

You can check the latest solvency ratio of all insurers in the IRDA Annual Report.  LIC manages the LOWEST SOLVENCY RATIO!!! Why so? Because, for LIC if it is managing less than mandatory solvency and if any such emergency arises then the Government will back and infuse the fund to manage it. Then who is using this money (by keeping the lowest solvency ratio)? It may be either Government or LIC. If they both are using it and actually generating better returns on it, then why can’t pass the same to all LIC customers?? No data on how it is utilized and in what way Government or LIC benefitting to customers.

Below is the list of companies with their solvency margin as per IRDA Annual Report 2013-14.

Solvency ratio 2013-14 IRDA

Even if a company decided to close or wind up the business then what?

If any private company willing to wind up its business, then they can’t do as and when they wish. There are some regulations to it also. If any company willing to wind up an insurance business then it has to merge with a new company and then bail it out of this business. In this way, an insurance company can’t close business and run away from the responsibility towards an insured person. The detailed guidelines are available HERE (You can read if you are interested).

Therefore, when it comes to insurance regulation, including LIC all companies are equal and have to adhere to rules of IRDA. Hence, without any hesitation, you can buy an insurance product with private insurers too.

Hope with these strict regulations it is hard for any company to wind up its business overnight. Any suggestions, points or doubts??

84 Responses

  1. Thanks a lot for the information. Is this applicable for health insurance as well?. What if the existing company goes bankrupt and our policy getting transferred to a different insurer, do the T&C of the original policy change? Will there be any impact on our claim made during the transfer process or it will remain as such for us?…I’m specifically asking this because a medical emergency can happen any time and during that period these type of formalities should not come our way. In that case is dealing through a TPA better than direct insurance company as they handle different companies?

    1. Dear Sanju,
      It applies to health insurance companies too. When you move to a new insurer, the policy conditions and features will continue as usual.

  2. Thanks for the clarity. I was looking for exactly something like this to clear my doubts regarding private firms. But seeing Sahara there in the list with high solvency actually puts some doubts again. What is the reason that so many people are still waiting for the payback from Sahara, even when it has such high solvency?

    1. Dear Saurabh,
      Sahara insurance issue is different than Sahara depositors. Sahara Life Insurance was taken over by ICICI Life Insruance.

  3. Thanks for the article, its atleast clear most of the doubts we have while opting insurance from pvt company. So is the understanding is correct that your term insurance is always remain safe and even if the pvt bank is bankrupt, bcoz other bank would collabrate and take the responsibility of the insurance taken by each individual, even if they have to pay the insurd amount to thr nominee.

  4. If I buy bajaj Allianz pos gosl plan. Maturity benefit will be after 15 years so if meanwhile company gets bankrupt or closes down then what will happen to the premium i paid and my maturity amount?

  5. How about taking a term insurance policy with Aegon life as they are owned by the tata group? Are they secure?

  6. sir can u please tell me about Indiafirst life insurance company is it stable this company is not so much famous in the market buying any term plan upto 85 years of age with my present age of 25 years can this company be stable upto this time period
    another question
    what if a life insurance company goes bankrupt and it have to merge with another companies according to rules
    but but another company does not want to acquire it??????? hen what will be the position of policyholders

  7. I have bought bajaj Allianz pos gosl plan. Maturity benefit will be after 15 years so if meanwhile company gets bankrupt or closes down then what will happen to the premium i paid and my maturity amount?

  8. Hello,
    For my safety if i purchase term plan from two different companies out of which one is LIC . After that if LIC settles the claim then another PVT company has to settle claim or it can deny the same even if LIC had settled.As both are working under IRDA rules, What will happen in this case . Kindly revert .

  9. Dear sir,
    I purchased two term plan 50L each from two different company 4years ago. For my second term plan I did not mention the existing policy details because at that time I have not received the first policy bond (which is not issued). Can we face any problems in future. Although my annual income above 6L.

  10. Dear Sir i have gone through artilce but still having doubt that suppose i have take term till 85 years age and at age of 55 yeras insurance companies bankrupy so what i understand from above article that bankrupt insurance company will be merge with another company and shall i need to pay premium to that new company or not ? If it is so then what will be premium and what will be terms means shall same terms will be continue with new insurance company or not ? Kindly elobrate.

    1. Dear Nirav,
      Yes, obviously you have to pay the premium to the new insurance company. The premium will not change just because the old company goes bankrupt. All terms and conditions will continue as usual.

  11. Hello sir, i have a doubt regarding insurence company bankruptcy…if an insurence company (eg .SBI life) become bankruptcy will govt pay the refund amount…..plzz replay sir

  12. Good Morning Sir,

    I am planing for term plan of TATA AIA for 85 yr and 75 lac from policy bazar, but i have some doubt
    My first question is that if death (anytype) at the age of 84 yr and 10 month so insurance company will be pay insured amount without deduction to my nominee,
    My second question is that should i purchase of term plan from policy bazar or direct from insurance company.
    My third question is medical should be teliphonic or physical because some companies are telephonic so tell me what is right or wrong because I am non smoker.


    Nikhilesh Joshi

    1. Dear Nikhilesh,
      “My first question is that if death (anytype) at the age of 84 yr and 10 month so insurance company will be pay insured amount without deduction to my nominee,”-YES.
      “My second question is that should i purchase of term plan from policy bazar or direct from insurance company.”-DIRECTLY.
      “My third question is medical should be teliphonic or physical because some companies are telephonic so tell me what is right or wrong because I am non smoker.:-Better physical.

      1. Hello sir,
        Thanks for giving valuable information….
        Sir is it possible to buy many insurance company plan..and all companies can pay…

  13. Hello sir, Thank you for your blog which is very helpful to all, but I have one query.
    I have heard that PNB is under loss and can be bankrupt, then what if I buy policy from PNB MetLife, am I safe after buying the policy. Please revert your reply asap.
    Thank you

  14. sir what if one group of company fail and got bankrupt. like reliance. their telecom business is about to close. having lot of debt. in that case will that effect their insurance business. or health insurance business

  15. Sir, in a reply for agent job, you have stated that LIC,ICICI,SBI,HDFC are stable company, then what about max life etc. Are they not stable?

  16. But what about term policy holder in case of bankruptcy of insurance company, he has to take new policy from other insurer after bankruptcy of company, as he would not get any maturity amount from RBI or re-insurer?

  17. Sir,
    I want to ask you a question regarding Term insurance.
    Suppose, if i have purchased a term life insurance from any company and if this company get shut down in the future then Where can i pay the scheduled premium of My Term insurance after its shut down??? And how can my family get sum insured amount from that company after dismissal of mine… ?

    Thank you in advance.

      1. sir can a agent bound to serve company if once he take licences or he can leave anytime he want ,is there any impact on insured when agent leaves his job or transferring his insured policy under other people like his family members???

  18. Dear Basu what is solvency ratio for the current year and why Sahara having high solvency ratio as described in the above table is not a leader in insurance companies

  19. Hello Sir.. Many Claps for your Fantastic articles which can benefit everyone to get some knowledge on insurance Policies..

    I need your opinion on 2 General Queries..
    1. If one Person takes an Life Insurance Policy, such as Prulife ismart, and insured for Rs.50 Lakh and pays his yearly premium.. In case of sudden accident, if the person dies within few months of start of his policy, will the Company Pay the Lumpsum to his Nominee?

    2. In Prulife Ismart plan, there is 2 Plans (LIFE OPTION AND LIFE PLUS OPTION).. Which one you feel the Best to move with..? Could you pls explain the main difference between these 2 plans..?

    Thank You

  20. Hello Basavaraj sir,

    I am 30yrs old lives in bangalore. married recently.

    I am paying 40K PA towards LIC Jeevan anand, 60K PA in equity MFs and a health insurance of SA 5L (will increase it to 8L in future) in New India insurance.

    I want to opt for a term plan and critical illness plans for myself & spouse.

    Going through some research, I found out ICICI iprotect life and Apollo munich critical illness plans are zeroed.

    1) Could you please give some analysis on Apollo critical illness plan also like u did for ICICI Iprotect plan.

    2) Also, provide top 5 critical illness plans as u did in case of term plans.

    3) Is LIC Jeevan anand plan worth to continue or should I switch to PPF??


  21. Hi,

    I have LIC Jeevan saral – 25K/annum – completed 5 yrs (when can i stop this to have minimum loss)
    I have 22L home loan at 8.55% for 118 months – (How i plan to get rid off ASAP )
    I have another LIC jeevan anand 76K/annum for 17 yrs, sum assured 12L – (Is it wise to continue it)
    I also have a health insurance of Maxbupa for me and wife covering 25L

    From above below are my few other queries.
    1. How much cover should i opt for by taking term insurance. I have registered with Aegon life for 60L cover for 80 yrs. Should i take more with LIC ?

    2. What will be best Plan so that i can aim to close my loan soon and then invest wisely for future.

    3. Are there any affordable consultants who can help me to plan and guide on above. how much that would cost me.

    Thanks for taking out time in reading above and providing your expertise advice.



  22. My Question: Suppose today I am purchasing a team plan of 1 cr from ICICI Pru life. After 20 Years if this ICICI close there business due to any reason (like Lehman Brothers of USA, kingfisher airlines of India),what procedure IRDA will follow to help me in that case. Kindly provide the link where IRDA has mentioned this procedure.

    If I die in 21st year of policy will IRDA give 1 cr to my nominee?

  23. Hi,

    I am looking at Term insurance plan from Max Life, and its premium is significantly less than ICICI and LIC.

    Is there something I should be worried about?

  24. hi..
    I m 30 yrs old
    i have taken sbilife smart performer for my wife, who is also working. i have already paid 3 of my installments of 5o000/anum. Is it worth to pay further. Or its just blocking my money.
    one more query…if i have to go for term insurance should i opt for lump sum sum assured or incremental income.

    1. Atul-SBI Life Smart Performer is a ULIP plan with high costs. Better you come out of it after 5 years (without surrender charges). For term insurance, opt a lump sum payment in case of policyholder’s death.

  25. Sir,
    I am at a beginner stage of insurance world. i want to buy a policy but confused.
    first i started to look for endowment, money back , pension polices of LIC.
    bu then i realized that these options are bad for wealth creation . PPF can do better than this.
    so now i decide that i will make 5 equal parts of my premium (which i supposed to spare for endowment policy). 4 parts i ll invest in PPF and from the rest 1 part i ll buy term insurance. Am i right with this, plz guide.

    also if i am taking term plan then how much cover amount should i opt for?

    1. Shailesh-Good to know that you decided to opt out of endowment plans. But don’t use PPF for your long term goals too much. Consider that as debt product. Use equity oriented mutual funds for your goals which are around 7+ years or so. Ideally one must have term insurance of around 15-20 times of yearly income.

        1. Dear Sir,
          Please advice me. I am having SBI home loan of 29 L since 3 years with maxgain facility , which is basically Overdraft account.(the facility given by bank itself) I and my wife is claiming 50 % each of the principal and interest amount for tax benefit. (about 60000 principal and 120000 interest each)
          whenever i get additional amount in my salary like bonus etc. i park that amount in my home loan account. i am not investing it in FD, PPF etc.. the money in my Home loan account is very flexible as i can withdraw any amount for any number of time. also it is reducing my loan interest on daily basis.

          some of my friends are saying that i am reducing my tax benefit part (interest) due to this.
          please guide that am i doing the right thing or not.

            1. thanks for reply sir
              but i am not clear with the reply (sorry for that)
              do you mean to say that instead of going for FD , PPF , SIP etc , i should keep repaying the homeloan first. this will give me more tax benefit.
              some says, saving is as good as earning more.
              some says, that keep home loan and investments as two different things.
              but whats the point in borrowing home loan at high rate and investing in low rate of interest.
              please guide.

              1. Shailesh-Hardest reality is those who go for LOAN for saving tax are not the real wealth creators. Hence, try to offload your loan as soon as possible without bothering about TAX-SAVING. Rather than concentrating too much on tax saving aspect, think what you want to create from your money, where you want to be down the line also what are your financial goals. Once these are clear, then think of investing. Product selection must be an end process. But sadly especially salaried select the products at first. They don’t know where they are heading.

  26. Dear basa,

    I need your advice- I have LIC jeevan Saral and paying 36000 per annum. Till now I have paid 6 premiums. Please advice it it is beneficial to continue in this policy? If yes then till how many years?
    I have a separate click to protect from HDFC for life insurance.


  27. Good information.

    However, do you meant to say that LIC is more vulnerable as compared to private insurers?

    Also, returns from LIC are falling consistently over the years. It is declaring less and less amount of bonus under the garb of “Safety and Security”. In such case, will it’s market share further erode?


    1. Ritesh-No, it is not more vulnerable because of lower solvency ratio. Why? Becuase Central Govt is there to rescue. During disinvestment Govt uses LIC and if anything goes wrong then it has to come into middle to pay and bailout the LIC. LIC turning to be one of the dangerous institute in the hand of Central Govt.

  28. Hi Basu, Thanks for educate us.
    I’ve to questions regarding above post:-
    1. What does these percentage shows us? I am ot able to understand with this percentage data of solvency margin.
    2. So we need to consider solvency margin data and claim settlement ratio to purchase the policy? Please also add more selection factor to select any policy or insurer.

    1. Pankaj-1) It states that for every risk they are taking like issuing a policy of Rs.100 sum assured they are depositing a solvency margin of Rs.150 as a safety major. Higher the solvency margin means companies keeping aside more safety measure.
      2) These two are an indicator. Along with that, if you need indepth analysis then go for company financial statement. Ideally, all of them park around 150%. So no need to scratch your head on this front. At the same time, claim settlement ratio is just an indicator, which not differentiate the products they settled. For example, in case of LIC, it settled more of endowment than term insurance. Hence, I feel claim settlement as a raw data. First look for your requirement, premium budget, policy features and comfort with company.

      1. Thanks for reply Basu.

        If i am taking reference of LIC then it shows solvency margin 1.54%. what does it mean?
        Does it shows that LIC having 54% more money comapred to 150% to pay policy holders?

      2. Thanks for reply Basu.

        If i am taking reference of LIC then it shows solvency margin 1.54%. what does it mean?
        Does it shows that LIC having 54% more money compared to 150% to pay policy holders?

  29. Thanks sir for the clarification …..,,as I only trust LIC I have 5 LIC policy but now I’m confused because according to you …..LIC return 5-6 % only. Can I surrender all the policy jeevan saral (sep 15 5 year complete) bima account (5 year )Jeevan saathi (5 year)plan 814 (1.5 year)

  30. Hi,

    Explained the situation in very simple way. I have a small query. If the insurance company has to deposit 150% of the insured amount then how are they making money.


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