Conversely, since corporate executives are often compensated with stacks of stock options, it’s possible they could be competing for short-term spikes in valuations to coincide with the vesting of their options.
A mutual company’s executive team is appointed by votes from their policyholders. With no stock or stock price to distract from their duties, the elected executives of a mutual company can avoid these conflicts of interest while acting as stewards of the mutual company’s balance sheet.
Reading: Which insurance companies are safe
read more about the difference between mutual insurance companies and stocks in a new tab.
national and state life and health guarantee associations
There is actually something similar to fdic insurance for cash value life insurance. in every state there is something called a state health and life guarantee association that protects policyholders. All are overseen by the National Organization of Life and Health Guarantee Association (NOHLGA). More information can be found at www.nolhga.com.
Together, these associations exist as a last resort to help policyholders if insurance companies become insolvent, similar to how the fdic does with failing banks.
here are 2 reasons why these collateral associations will probably never come into play for you!
- size matters (and so do qualifications): you can click here to see nolhga’s list of “impediments and insolvencies.” You’ll find that many of the companies listed are smaller, lesser-known, riskier companies that didn’t have the backing or the law of large numbers on their side to spread the risks they did support. in fact, many of them didn’t even sell life insurance as their core business. Companies that focus on riskier lines of insurance business, such as health insurance, disability insurance, and long-term care insurance, tend to be much more volatile than companies where their primary offering is a large, stable block of insurance. permanent life insurance.
- Other life insurance companies often get involved: If you click on any of the companies nolhga has listed under “impediments and insolvencies”, you can clearly see that the guaranty association only played a temporary leadership role before brokering the insolvent insurance company’s business bloc with other life insurance companies that are much more stable. outside insurance companies are happy to step in to purchase these policies. adding them to your existing business block will spread your risk and produce long-term profit.
Let’s now talk about the 2 main “near misses” of our time:
The fact that these two major insurance companies have gone bankrupt should make you more comfortable investing large sums of money in life insurance; based on actual results that occurred for policyholders.
near miss #1 – california executive life insurance company
During the 1980s, a younger but fast-growing life insurance company called “Executive Life Insurance of California” captured a ton of market share and became incredibly popular. Unfortunately, they overinvested in “high-yield bonds” that soon became known as “junk bonds.” During the infamous S&L scandal, their balance sheet revealed that they were heavily allocated to these types of bonds, which quickly declined in value.
In 1991, the company was declared insolvent, meaning it did not have enough assets to support policyholder liabilities.
You’re probably wondering, “if they didn’t really fail, who rescued them?”
It was actually a group of the other major life insurance companies. this group stepped in to form a holding company that backed each of the promises made by the insolvent insurer. Aurora National Life Insurance Company is still around today and still services some of these old policies.
Here’s the irony of this situation: Since prevailing interest rates were much higher back then, the lowest guaranteed credit rate on those older policies is actually higher than most credit rates. unsecured currently offered. therefore, owners of these policies issued by an insolvent insurance company are actually earning higher fixed interest rates than policies issued by major companies today, since those original warranties were transferred through insolvency .
The self-interest of the insurance companies actually helped society.
why did that group of life insurance companies decide to step in and bail out executive life of california?
there are two reasons:
The first reason we already discussed is that a block of life insurance will almost always generate a long-term net profit for the acquiring company. It’s similar to how today’s hedge funds are paying “life settlements” to policyholders and absorbing abandoned life insurance policies.
but that’s not the main reason why these other insurance companies went to the trouble of forming this entity to buy this big insolvent insurance companyhere’s the main reason: if other insurance companies didn’t step in and honor those promises to policyholders, the industry as a whole would begin to unravel. that you would feel comfortable putting up substantial sums of money with any insurance company if even a single policyholder were scammed. It is quite difficult for the insurance industry today to train and retain agents. imagine if this kind of egg was on the face of the insurance industry in general. I probably would have become a mortgage broker.
To summarize, the industry itself has an abiding interest in maintaining the overall solvency of the life insurance industry. As they have done in the past, a collective of insurance companies will most likely step in and quickly bail out any other large national company that shows the first sign of deterioration.
I think you can count on industry self-restraint with a “no insurance company left behind” stance on insolvency.
near miss #2 – aig
almost everyone remembers this one.
It was the canary in the coal mine before the 2008 financial crash. As in the junk bond debacle, AIG over-allocated itself in risky derivatives related to mortgage-backed securities. american international group was a large international insurer that collected premiums from policyholders around the world for each type of insurance coverage offered.
The life insurance division itself had nothing to do with the crisis that followed. in fact, its life insurance division was and still is one of the most financially stable components of that company.
once the real value of these complex financial products was found to be virtually nil, aig went bankrupt because it had saturated its balance sheet with these investments in hopes of excessive returns.
so who rescued them?
this time it was the federal government of the united states.
4 words: “too big to fail”.
from 2008 to 2013, a.i.g. = “government-insured Americans.”
How come the insurance companies didn’t get together like they used to?
aig was such a large global giant of an insurance company in 2008, that the surplus of all the other insurance companies combined could not cover all the liabilities that aig was insuring.
So why exactly did the federal government get involved in the insurance business?
it’s the same reason aurora rescued executive life.
if citizens stop trusting the whole concept of insurance, then western civilization as we know it will begin to unravel.
Fortunately, insurance is ultimately a profitable business. so aig, as an organization, quickly recovered in 5 years. all united states taxpayer money that was pumped to support aig was returned to the us treasury at a substantial profit when aig recovered and regained its independence.
Remember, the insurance business wasn’t the problem. it was greed and the mischaracterization of assets on their balance sheet that turned out to be much riskier than presented.
personal note: throughout this period, I personally only sold one aig policy to help a client convert his aig term policy after it became uninsurable. client became an avid skydiver and already owned an aig term policy. We converted his existing AIG policy as he could no longer qualify after becoming an avid skydiver.
During this time, I also serviced some older aig whole life policies for a different client that I didn’t originally sell. While adhering to these policies, I noticed that they never missed a beat throughout the entire debacle. they continued to get credit just like they were supposed to, and customers even accessed their cash value during this time.
if insurance companies fail, we all have much bigger problems
here is the final result. If you’re considering using permanent life insurance as a savings or investment vehicle, we have to disclose that, technically, there is always the risk of your particular insurance company becoming insolvent, no matter how remote that risk may be.
If the past 160 years of history (including depressions, recessions, inflation, world wars, bank failures, and insurance company bailouts) tell us anything, it’s that this occurrence is very rare. in fact, the risk of being scammed out of any dollar amount is incredibly remote.
The rewards you get for taking these small risks can be manifold:
- a better place to park your liquid cash
- a better growth opportunity without market risk
- multiple tax advantages
- additional protection benefits ranging from chronic/critical illness benefits to protection against lawsuits and your standard death benefit (depending on how and where your policy is written).
- insurance policies
- savings account statements
- share certificates
- real estate deeds
Also, the fact that the federal government has already stepped in to bail out a large company that went off the rails, didn’t that set a precedent? why now would they let another company go bankrupt if for some reason the insurance industry can’t control itself?
And if the US federal government couldn’t step in to save an insurance company, does it really matter where you have your liquid paper assets parked right now? Wouldn’t all your paper assets be essentially worthless? things like:
Would any of these documents have any value? Probably not, apart from lighting a fire for yourself or as a hygiene product as well.