What happens when a life insurance company becomes insolvent, it is rescued by other life insurance companies that have headquarters or do business in the same state as the failing company. This has little effect on the policyholders of the failing company. For some time, however, they may be unable to withdraw money. Eventually, though, they will receive all or nearly all of what they are entitled to under their contracts.
The policyholders aside, the failing company is rescued by those other companies as a recognition of responsibility of their company. Sometimes a state’s companies’ receive an assessment by the state regulators to help bail out a failing company, particularly, in the case of small companies. More often, however, a company larger than the failing one will act on their own initiative or with only slight encouragement from the state regulators.
Once again, the failure of a company has little effect on the policyholders themselves, except the possibility of being unable to withdraw money from their policies and sometimes being shortchanged slightly.