If you want to know why it's important to know the health of your life insurance company, ask Vince Watson. His daughter, Katie, was left severely disabled and in need of 24-hour care because of a series of tragic errors at a hospital.

The hospital purchased a life insurance policy that was supposed to pay for Katie's care for the rest of her life. But less than a decade later, the insurance company failed and the Watsons learned a hard lesson about the limits on life insurance company guaranty funds.

The monthly annuity payments that were supposed to pay for Katie's care were cut in half. The home that they'd built to accommodate a hospital wing for Katie was foreclosed on. The Watsons filed for bankruptcy protection. The family believes that they are millions of dollars poorer because of the failure.

And Vince Watson, 68, says that although he can make sure Katie is well cared for while he's alive, he's not sure whether there will be enough money to cover her needs when he and his wife are gone.

"We have a tremendous feeling of betrayal whenever people say that policyholders are fine (in a failure) and are made whole," said Watson, reached at his home in Phoenix. "Katie and our family have been through a lot because of this problem."

Today's miserable economy makes it more important than ever for policyholders to check what's backing their insurance policies, said Martin Weiss, author of "The Ultimate Depression Survival Guide" and president of Weiss Research in Jupiter, Fla.

That's because insurance claims rise and investment returns fall in a bad economy. That combination might not topple a company right away, but it can severely weaken it, leaving it vulnerable to failure later, Weiss said.

Indeed, the last great recession was in the early 1980s. About a decade later, there was a rash of insurance company failures, including Executive Life Insurance of California -- the Watsons' insurer -- American Integrity Insurance and Andrew Jackson Life, according to the National Organization of Life and Health Insurance Guaranty Associations.

Because life insurance contracts are often long-term commitments you make to ensure that your family doesn't face economic collapse, it's important to understand what would happen if the company that backs you were to fail. As the Watsons learned the hard way, the answer isn't always pretty.

How well you fare in an insurance company collapse will vary greatly depending on the type of policy you hold.

Some types of insurance policies -- variable annuities, for example -- have a structure that protects investors, Weiss said. That's because the investment portion of the annuity is in a trust that's likely to be managed by a separate investment company. In an insurance company failure, you would get those assets back without limitation. (Whether a variable annuity is a good investment is another story.)

That's not the case if you own a large term or whole life policy, a so-called universal life policy, a fixed-rate annuity or a guaranteed investment contract. In the event of a failure, claims on these policies would be paid by a state guaranty association -- if they're paid at all. And guaranty association coverage is not as simple or standard as the insurance coverage provided to bank accounts through the Federal Deposit Insurance Corp.

Although there are some national standards, coverage backing insurance policies is set on a state-by-state basis. In some instances, it can be tough to determine which state's fund might cover you. Continued...