Kim Butler and here team have done it again in September with an awesome newsletter!
This is a must read or listen…
LISTEN: Financial Shelter [mp3 audio] (6:43)
READ:
(1,003 words; just over 5 minutes to read)
A small article on an inside page of the February 26, 2008 Wall Street Journal reads “FDIC Readies for a Rise in Bank Failures.” Hmm. Looks like the FDIC knew what was coming. Here’s the lead from a Sunday, July 13, 2008 NPR report:
The purpose of the FDIC is to insure the savings of depositors and the agency’s actions were typical for such an intervention: The government stepped in on Friday, and by Monday, the bank’s customers were being served, ATMs were working, and debit cards and checks were honored. But regulators also acknowledge that more banks are likely to fail.
As the housing crisis unwinds, it’s unnerving to think that even your savings might not be safe. But despite the trouble plaguing many financial institutions, guess which sector appears to be holding steady? Well-managed, mutual life insurance companies.
A report on the “Townsend 100″ (one hundred life insurance companies, comprising 85% of the industry) published in the July 2008 National Underwriter, showed that even in the tough economic environment of the past several years, the companies showed a record $30.4 billion in operating earnings in 2007, and a surplus gain of 6.4% over the previous year, the highest percentage increase since 2004.
As a specific example of financial strength in the midst of widespread downgrades for financial institutions, on July 18, 2008 Standard & Poor’s announced it had raised credit and financial strength ratings of the Guardian Life Insurance Company of America from AA to AA+. S&P cited a “very strong capital adequacy and liquidity, a stable earnings profile” as reason for the upgrade, and added there was “limited speculative-grade credit risk and no exposure to subprime mortgages.”
It’s no surprise that life insurance companies remain solid. No financial institution – bank, brokerage house, mortgage lender, insurance company – is free from the possibility of failure. But there are several characteristics of life insurance companies that tend to make them more capable of surviving financial distress.
Among the most prominent:
- Life insurance companies cannot practice fractional banking, i.e., they cannot lend more than they have in deposits. In addition, they must keep sufficient reserves to meet claims. These constraints promote conservative and prudent use of the premiums they collect.
- Their primary business purpose – providing monetary benefits on the death of an insured individual – is supported by extensive mathematical research. Unlike other types of insurance where coverage and costs may be manipulated through definitions of what is covered or deductibles and waiting periods, life insurance is based solely on whether one is alive or dead. This makes for stable pricing, and a very low incidence of insurance fraud.
- The mutual company model is cost-efficient. Mutual insurance companies, as opposed to stock companies, are owned by the policyholders and rely on premiums for capital to support the company, with any excess money returned as dividends to the policyholders. John Bogle, the pioneer of the Vanguard mutual funds, acknowledged that he built his company on the concept of a mutual life insurance company because it was a “structure designed to put the client in the driver’s seat. And that structure must lead to a strategy that is founded on delivering services at the lowest reasonable cost.”
In his 2006 book Money, Bank Credit, & Economic Cycles, Spanish economist Jesús Huerta de Soto provides the following assessment of life insurance companies relative to banks:
Occasionally, some financial commentator will criticize life insurance as a “poor investment,” comparing it to the historical return performance of some stock, index or other financial instrument. But this criticism overlooks some of the other, less tangible aspects of owning cash value life insurance. One of those intangibles is the designed financial stability that has allowed life insurance companies to remain solid in times of economic turmoil.
We know you’re clear on some of the aspects of life insurance, and how to use, especially the cash value while you’re living. But one of the things that sometimes we forget is how to use the death benefit while you’re living.
So, if you’re not clear on this and you need a reminder, check out: Live Your Life Insurance – The eBook for an e-booklet on using your death benefit while you’re living.
We also welcome any questions in this area to continue to fuel your growth of knowledge and your use of this financial tool.
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