How Safe are Life Insurance Companies?
We frequently discuss high cash value life insurance here at the Money Advantage, yet with the financial uncertainties of COVID-19, how safe are life insurance companies?
How strong is the life insurance industry really? What impacts do today’s low-interest rates, economic turmoil, and the pandemic have on my long-term growth rates and the policy guarantees? How do they affect the life insurance industry as a whole? Do insurance companies have enough reserves to weather low returns and higher costs? Are they able to maintain their guarantees? Are they still a safe place to put money?
If you want to see how low interest, low bond yields, and higher mortality can impact you as a policy owner, know if you can trust whole life guarantees for cash value and death benefit, and find out how strong this nearly indestructible industry is during unprecedented times, so you can know what to do, tune in now!
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In this episode on the safety of life insurance companies, you’ll learn:
- How interest rates and bonds affect the life insurance industry
- Why the US is better off right now than you’d think
- A brief history of the life insurance industry
- The “checks and balances” of mutual insurance companies
- And why COVID isn’t impacting the industry as much as you’d expect
Right now, many financial products and systems are in flux. That uncertainty may not instill confidence in your financial future. COVID-19 has certainly impacted the financial sphere, so let’s unpack what that means for life insurance.
The life insurance industry has long been a pillar of certainty and financial stability, and fortunately, we have high hopes that this will continue to be the case. Historically, these companies have outlasted even the toughest of financial straits.
Table of contents
The Safety of Life Insurance Companies is a Part of the Bigger Picture of Creating Wealth
While the safety of the industry is a critical piece of protecting and preserving your wealth, it’s just one small piece of the bigger journey to creating time and money freedom.
That’s why we’ve developed the 3-step Cash Flow System. It’s your roadmap to go from just surviving, to a life of significance, purpose, and financial freedom.
The first stage is the foundation. You first keep more of the money you make by fixing money leaks, becoming more efficient and profitable.
Then, you protect your money with insurance and legal protection and Privatized Banking.
Finally, you put your money to work, increasing your income with cash-flowing assets.
How Safe Are Life Insurance Companies Facing Internal Challenges?
Many of the current concerns around whole life insurance relate to the low interest, low bond yields, and low internal growth we’re seeing right now. We don’t blame people for translating this slow-down as a warning sign. In addition, there’s a possibility of higher claims in a pandemic—and will the companies have enough capital to weather that storm?
If you’re considering the impact of these factors on your life insurance policies, you’re on the right track. It’s important to stay ahead of the curve for your financial well-being. So, let’s look into some of these concerns and find the truth in these statements.
The History of the Life Insurance Industry
Fortunately for policyholders, the life insurance industry has a long history of navigating tumultuous financial times. Historically, insurance companies have paid dividends each year for more than 100 years, despite dividends not being guaranteed. That means companies paid dividends in the 2008 crash, during multiple wars, and even the Great Depression.
Due to the actuarial nature of life insurance and their long history of data collection, mutual insurance companies have been very accurate in their assumptions. Even when they haven’t paid exactly at their projected rates, the industry as a whole has year-in and year-out consecutively paid dividends. Therefore, these companies have a significantly long history of being profitable while paying claims through the worst of times.
So, let’s look at what we’re dealing with and see how it measures up to the life insurance industry’s historical precedent.
Low Interest Rates
While interest rates are low, it’s not an immediate cause for fear. There’s a reason for low rates, and it all starts with banks.
If you look at the federal funds rate, what you’re seeing is the rate at which banks and other institutions lend money to each other. By law, banks must keep a percentage of their customer’s money on reserve—otherwise known as the money they can’t earn interest on (by lending it to customers). As a result, banks toe the line as much as they can, lending money back and forth between banks.
The federal funds rate is used to control the supply of these reserves, and thus inflation and other rates.
Raising the federal funds rate makes it more expensive to borrow money. This lowers the supply of available money, thus increasing short-term interest rates and keeping inflation in check.
Lowering the rate has the opposite effect, and actually increases the money supply by lowering short-term interest rates.
The Federal Reserve is using these low rates to boost the economy. However, this means that not only is it hard to get a good rate on liquid money right now, but there’s also an indirect impact on the life insurance companies.
While the low-interest rates are not ideal for the insurance companies, they’re not detrimental. They’re a temporary situation. The federal funds rate has, in fact, gone through an ebb and flow over the years.
Bond Yields Follow Interest Rates
Currently, the yields on bonds are low. The falling interest rates actually push the price on bonds higher, which, in turn, lowers the yield of the bonds. It’s normal to speculate what happens to the life insurance companies at this point, as many companies are heavily invested in bonds. The lower their returns, the lower the dividends that companies can pay. So naturally, the low yield on bonds slows the growth of life insurance through interest and dividends.
The good news? Life insurance companies, by nature, have very conservative investment structures.
On top of that, the industry is highly regulated, with the bulk of their investments in investment-grade corporate bonds. These bonds all have varying term lengths, purchased in quantities not available to the individual investor, and have strategically overlapping maturity dates due to bond laddering. That means that there are always bonds paying out. And this provides the capital to purchase new bonds at current rates. The long-term bond diversification strategy increases overall returns and long-term stability.
While low bond yields are nothing to celebrate, mutual life insurance companies have successfully and masterfully navigated low rates for the last 20 years.
Mutual Companies Are Positioned for the Long-Game
Participating whole life insurance companies, where policy owners participate in the profits, are invested in the long-game. Because these companies offer certain guarantees, they have to be prepared. Stock-held companies, however, plan over shorter periods of time.
In fact, mutual companies work much in the same way we encourage policyholders to operate. They have large cash reserves, like a policy’s cash value, in case of opportunities. And when relatively high-yield bonds were dumped on the market at low prices, these companies had the capital to jump on the opportunity. For carriers who made that move and are willing to wait, it should prove to be a good decision as the bonds mature.
Mutual companies also operate on a required minimum of a 1:1 ratio. That means that for every dollar allocated to paying claims, there’s at least a dollar in the reserves.
Mortality Isn’t a Current Concern
And now, we’ve come to one of the largest “what-if” scenario on everyone’s mind. What if the increased death toll makes the industry unstable? And for the life insurance industry, it has proven not to be a huge concern.
Whole life insurance works because of a carefully designed system that supports death claims. After all, the death benefit is guaranteed as long as the policy is in force. And death is an event we all experience. Without the proper structure, life insurance companies would have felt the strain long ago.
One of those structural “balances” is that companies weigh the risks of insurance through health exams. Unfortunately, some health conditions can prove to be too high a risk for life insurance companies to insure. Disqualifying Conditions with a high chance of death (although some can still purchase insurance at a significant markup).
Of course, this matters because COVID-19 has had a greater effect on those with pre-existing health conditions. And while this can be the cause of unfortunate and pre-mature deaths, those conditions likely mean they’re not insured.
And while this is not always the case, such as those who developed health conditions after becoming insured, COVID deaths have not proven to be disruptive to the life insurance industry. One carrier with a lot of business in New York confirmed that while there was an increase in death claims due to COVID, it was not significant enough to warrant structural changes within the company.
With the death rate of COVID in decline, even in the face of higher case counts, it seems reasonable to conclude that the life insurance industry can weather the storm.
So How Safe Are Life Insurance Companies?
It’s safe to say that the life insurance industry has the tools and resources to make it through this financial climate. Over the last century or so, the industry-at-large has survived. Their conservative product pricing, as well as other checks and balances, have served them through the worst financial crises.
You can be confident that although rates are low, mutual life insurance companies strive to give accurate reports of their interest rates and dividends. If rates continue to stay low, participating whole life insurance policies may offer more security than any other financial product.
Resources to Evaluate the Financial Safety of Life Insurance Companies
- Life Insurance Company Ratings – How you can use their ratings to verify the financial strength and safety of each individual life insurance company
- Our 8-point checklist to make sure you get the best life insurance company here.
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