Can You Count On Your Life Insurance?

Scott's Soapbox

Remember: for life insurance to serve its function it must be there when you need it. Consider these two things:

1) Your life insurance company must still be in business. (Sure, gov’t are supposed to guarantee payouts just like the FDIC is supposed to guarantee deposits. But, in reality, there are still IndyMac Bank depositors who are still waiting for their cash.) If your life insurance company fails you had better have already executed your backup plan. Just like a bank failure you’ve got to get your money out before everyone else does.

2) Your death benefit / cash value must not be stolen by inflation. When your dad was young he may have taken out a generous $50,000 policy. How far would that go in today’s dollars? You may have a $500,000 policy but if we face triple-digit inflation in the next three years [Wall St Journal Talks (hyper)Inflation] OR if the dollar is replaced with an alternative currency [WSJ Talks Amero] will you be left with anything of value?

The last time we had our money system changed (gold replaced by Federal Reserve Notes in 1933) it was devalued by 75% in 4 days. (FDR outlawed and confiscated gold in 1933. He declared a 4-day bank holiday and, when the banks reopened, all the gold that had been taken from the American people was revalued from $20 to $35 per ounce, a net 75% paper currency devaluation.) If the dollar is replaced with the Amero and the CONgress says you get one Amero for every two dollars what’ll that do to the value of your insurance?

Q. Guess what I did around the same time I cashed out my 401(k)s and put the proceeds into gold and silver?

A. I took out loans against a number of my life insurance policies and put that into gold and silver as well. The life insurance stays in force but if the company dies or inflation eats away the value much of my money’s already out and into assets that’ll INCREASE in value with inflation.

If you’re not sure your insurance company will survive the next few years you could always replace your existing policy with a term policy. It’ll be a lot less expensive and you can take the leftover cash value from the closed policy and buy gold, silver or other physical assets.

Sure, I’m Paranoid. What’s Your Point?
Mine was (is) still an “extreme” solution that only makes sense if you think things are going to get horrible. I just want to give you some ideas; you should always make your own informed decision.

BTW my policies are through Northwestern Mutual Life. I checked their S&P credit rating two weeks back, they’re still AAA “stable” (and have been since 1987). I went with the most conservative company I could find back in 1993 when I started with life insurance. So, yes, I’m being really paranoid here with my actions.

Please stay alert and protect yourself and your loved ones.

Scott

dailywealth_100x93This sobering missive is from the excellent Daily Wealth newsletter. many of us count on our life insurance, either to support our family if we should die OR for emergency cash.

This Crisis Is Just Starting to Hit the Headlines
By Dan Ferris

Two recent headlines in the Wall Street Journal have confirmed my worst fears are coming true… much faster than I thought they would:

On Tuesday, the Journal ran a story called “Life Insurers Are Finding Their Fates Tied to Stocks.” Stock market losses might hit more than your equity portfolio…

lincoln-natl_100x41Many life insurance companies sell variable annuities and other guaranteed return products. These products guarantee the investor will receive either a minimum return… or the gain in the S&P 500… whichever one is larger.

With the big stock indexes way down, losses have already piled up. The hedging that supports guaranteed investment products is too dense to get into here… But as the Journal pointed out on Tuesday, big life insurers like Lincoln National and Hartford have already suffered ratings downgrades due to investment losses and exposure to variable annuities. Moody’s also said there’s a risk of even greater losses.

hartford_100x91But variable annuities aren’t even the biggest problem. No one has quite caught on to the real issue yet…

Last week, the Wall Street Journal ran a story called “Commercial Property Faces Crisis.” It reported default rates on $700 billion of commercial mortgage-backed securities could hit 30%, and noted that as many as 700 banks could fail as property loans go sour.

So what does all that have to do with life insurance companies?
The life insurance industry has put a lot of money into the commercial property market. Connecticut-based hedge fund Bridgewater Associates estimates 10% of the life insurance industry’s investments are direct commitments to commercial real estate projects.

Commercial real estate losses are rising rapidly. The delinquency rate on commercial mortgage-backed securities is already nearly as high as in the 1990s recession. Back then, the financial industry lost $48.5 billion on commercial real estate debt holdings.

The current commercial real estate crisis will certainly be much worse, due to the much larger real estate bubble this time around. The Journal reported U.S. banks could lose as much as $250 billion on commercial real estate. They’re not the only ones.

Life Insurance Companies Crippled?
As I explained last month, insurance companies are state regulated. Every state determines how much capital insurance companies have to keep on hand according to their financial strength and credit ratings.

As commercial real estate continues to collapse, life insurance companies won’t have enough capital on hand. That will cripple their business… and their shares.

metlife_100x76Take MetLife for example. MetLife has $36 billion worth of direct exposure to commercial real estate… and less than $19 billion of tangible equity. A 25% drop in the value of its commercial real estate holdings would cut tangible equity in half. That would crush the stock.

MetLife isn’t alone. I’ve got my eye on 13 North American insurance companies. And all of them will take large writedowns due to commercial real estate and variable annuity exposures. At least one of them will fail over the next year.

I wish I were wrong about this. And I have nothing against any of the companies involved. Many are well run and, until now, had decent track records as good investors.

But they simply can’t get out of the way. They’re like giant hotels sitting on a sunny tropical shore… with an enormous tsunami headed straight for them.

Life insurance companies have even worse times ahead than what they’ve already endured.

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2 Responses

  1. Not to worry the gov dished out 800 billion to solve the problem. An lets say they took only 500billion to do so. They just put this in troubled banks. An making interest too.Then the banks can lend 10 to 1 ratio out to ever they want. An its sure not the american common people. So the numbers are majic we get 500,000,000,000 in an a 10- to 1 factor through the fractional resrve banking system we get? 5,000,000,000,000 trillion. An if you loaned this out at even 7% interest money is no problem.

  2. I really liked your opinion! I look forward to more insightful info.

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