When insurance company AIG—which was considered “too big to fail”—was on the brink of failure during the Great Recession, the U.S. government stepped in to bail out the company in 2008. Bailouts like that don’t happen every day, though.

In fact, you probably shouldn’t count on Uncle Sam saving your insurance company if its finances take a nosedive. However, you’re not totally out of luck if your insurer goes under.

The states regulate insurers, and all 50 have systems in place to protect policyholders if an insurance company goes out of business. It’s important to understand how the process works and what sort of protection you’ll get. Better yet, you should know what steps to take to avoid ending up with an insurance company that goes out of business so you don’t have to rely on the state to come to your rescue.

Why Insurance Companies Go Out of Business

Although the insurance industry is highly regulated, insurance companies do fail for a variety of reasons. For example, they might underprice their products and have higher-than-expected insurance claims, as long-term care insurer Penn Treaty did. The company was declared insolvent in 2017, and its failure was considered one of the largest in U.S. history.

U.S. insurance company insolvencies peaked in the early 1990s, with more than 50 companies becoming insolvent in 1992 alone, according to a study by the Society of Actuaries and Canadian Institute of Actuaries. In recent years, that number has been less than 10 annually. For policyholders, though, even one failure a year is too many if it’s their insurer that goes under.

How States Protect Insurance Policyholders

When an insurance company runs into financial trouble, the guaranty system in the state where the insurance company is headquartered will come to the rescue, so to speak. All 50 states, the District of Columbia and Puerto Rico have insurance guaranty associations, according to the National Conference of Insurance Guaranty Funds.

Most states have both a life and health guaranty association that covers life, health, disability and long-term care insurance policies as well as annuities, and a property and casualty guaranty association that takes care of auto and homeowners policies and workers’ compensation companies. Insurers licensed to sell insurance in a state must be members of the state’s guaranty association and pay into a guaranty fund that protects policyholders.

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