Monday, February 2, 2009

Are Life Insurance Companies Next To Fall?

As we watch banks fail and beg for government aid, problems in another important financing services sector could be getting overlooked. With everyone already losing sleep from worrying about the status of their retirement accounts or even their jobs, the last thing they need to worry about is the status of their life insurance coverage. After all, we get life insurance coverage so we don’t lose sleep thinking about how our family will manage if we die. The fact that the insurance industry is now lobbying the government for help is not a good sign, though.

Many of the big life insurance companies have been in business for a long time—more than a hundred years in some cases. They have managed to make it through numerous recessions and even the Great Depression. What is it then about today’s economy that is putting some companies in such dire straits? The answer lies in the investments being made by the companies in question. One of the biggest concerns for insurance companies right now is that they have a lot of outstanding guaranteed annuity contracts. That means that regardless of how the market performs, they are still required to pay out a set percentage rate to the contract holder. The problem of course is that returns aren’t very easy to come by in today’s marketplace. Stocks are losing money for the insurance companies, and government bonds don’t pay out enough. To make matters worse, some insurance companies even invested in assets that they thought were safe, but have come to find out were not. Here is a line from a recent article in the Washington Post: “The insurance industry's wherewithal is closely tied to the health of the broader financial system. If the investments that insurance companies make with your premium dollars don't perform well enough over the long run— or even the not-so-long run— insurers could have trouble keeping their promises.”

The good news for those of us with life insurance policies is that some—if not all—of the policy is guaranteed. Much like how deposit funds are guaranteed up to a certain amount, so too are life insurance contracts. According to the Washington Post, “The individual benefits guaranteed by the associations vary from state to state. The guarantees in most states are $300,000 in death benefits, $100,000 in cash withdrawals from life policies, $100,000 in cash withdrawals from annuities and $300,000 total per person, according to NOLHGA.” One important note, though, is that this insurance guarantee works differently than how the FDIC works in the banking industry. Insurance companies are in essence guaranteed by other insurance companies, so if one company goes under it will directly impact the rest. So it could be possible that one failure could lead to a string of failures, each one pushing another company over the brink. It is unlikely that the government would allow such a thing to happen, especially considering their propensity to rescue vital industries; nonetheless, it is a possibility to ponder.

If you have read the story in the Post you will probably note that though the industry admits to approaching the government for aid, they have also expressed that they have plenty of money to pay claims. This sounds eerily familiar to what the banks said before all heck started breaking loose. Of course they are going to say they can pay claims. If they said otherwise, then no one else would do business with them and clients who could, would run for the doors. The bottom line is, if they didn’t really need the money why would they approach the government for help?


Robert said...

I would like to know which life insurance companies have asked for a government bailout. Can the author of this article speak to this request?

Eric Ames said...

This post was based on information gained through this article from the Washington Post:

In the article it doesn't specify which insurance companies, but rather it says that the industry is lobbying for aid.

Karl said...

Thanks for the information. I just bought a policy, 15 years term, $100,000 payout. The point of it, is that I want my wife to be able to keep our house if I die. I never would have worried about this before the "crash", but what if I die and they can't make the payment?

Now that some time has passed, can you tell us if any life ins companies have received a bailout?