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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Maybury Issues Inflation Alert

Richard MayburyRichard Maybury describes himself as “The 2,500-year old man,” referring to his deep study of history (economic & otherwise) and how it repeats today.

Back in December Mr. Maybury warned the current deflationary environment would soon flip into a strongly inflationary one [Deflation Xforming to Inflation Soon]. At that time he said, “In any case, when I think the bottom has happened, I will let my subscribers know on the Subscriber Access part of our web site. No guarantees, but I’ll do my best to get it right.”

Yesterday he issued the alert. [Read full text here.]

He says, The bottom of the deflationary stage of this crisis has arrived. However, it is not an unqualified call to buy every non-dollar asset you can get your hands on.

“As you know, US officials plan to force taxpayers who pay their debts to subsidize those who don’t. This is diverting flows of money, creating larger profits in some areas and larger risks in others. There are colossal opportunities now, but also traps.

“I believe it is highly likely the world is entering the worst economic crisis since the fall of the Roman Empire. Never before in 2,500 years of economic history have people gone through this kind of situation with a world reserve currency that was fiat paper, not gold. We’re trying to ride out an 8.0 earthquake in a house built on sand.”

Subscriber Only Details
As the details are only for subscribers of Mr. Maybury’s excellent Early Warning Report I’ll only summarize it here. Five specific events in March persuaded him to call the bottom. 

1) March 23, 2009. China’s central bank governor said the US dollar should be replaced as the world reserve currency. That was the most powerful attack yet on the dollar’s credibility. (China is the largest holder of US dollar assets.)

As foreign holders begin to question the dollar’s viability they will try to dump their greenbacks. Lots of things inside the US are at fire sale prices, so, as these foreign greenbacks are shaken loose, money will flow into the US to buy those bargains. This will increase the money supply in the US, adding to the Federal Reserve’s own inflation of the money supply.

2) Increased fear of the dollar will also contribute to a rise in velocity, both inside and outside the country.

3) March 20th, 2009. At the Independent Community Bankers meeting a Bernanke squeeze doll was handed out, and Bernanke was the target of ridicule. The only thing backing the fiat paper dollar is the credibility of the US central bank. When foreigners see the Fed’s own banking community jeering the Fed honcho, the loss of confidence in the dollar will worsen and contribute to a rise in velocity.

4) March 18th, 2009. The Fed announced it will purchase billions of dollars of mortgages and government bonds. This will inject more new dollars into the financial system, and direct hundreds of billions of them into real estate. The real estate bubble will be re-inflated. [See Dollar Death in May?]

5) Orders for big-ticket durable goods, new homes and existing homes have risen recently. This shows that money is on the move and flowing back into some of the largest sectors of the economy.”

Mr. Maybury thinks for several months we will experience more of a U-shaped bottom than a V-shaped bottom.

For a while, a lot of money may leave the more liquid financial investments such as stocks, bonds and CDs, and flow into real estate. The beginnings of the new real estate bubble could be accompanied by a further deflation of stocks, bonds and perhaps even commodities.

In short, the re-inflation of the housing bubble could be so intense that it will suck money out of the financial markets.

Mr. Maybury expects the first incident in the coming inflationary crisis will be a global monetary disaster, with the dollar plunging in international currency markets.

Conclusion
Mr. Maybury recommends an assertive strategy to take advantage of the opportunities the inflationary trouble generates.

He is currently buying gold, silver, platinum, specific silver mining stocks and a specific solar energy company that he pegs the risk at 2.0 or less – and the three-year profit potential of 1,500%. (Subscribe if you want more specifics.)

And I love the way Mr. Maybury closes his special alert, “You are on my mind constantly, and I am doing all I can to help you stay safe and prosperous.”

See also:
Inflation, Intervention & Velocity of Money

Inflation, Intervention & Velocity of Money

Richard Maybury describes himself as “The 2,500-year old man,” referring to his deep study of history (economic & otherwise) and how it repeats today.

Here’s a clipping from the front page of his latest edition of the U.S. & World Early Warning Report, for your enjoyment and enlightenment.

2009-03-ewr-p1e1

Click to see entire front page.

This is a really worthwhile newsletter, deeply insightful and forward-looking (forecasting trends 4-6 years in advance). He’s also one of the few researches actively tracking the velocity of money. The VoM is an early warning system for the coming DD (double-digit) or even hyper-inflation.

2009-03-dollar-velocity

ewr-2009-03-p3-a-botched-prediction_350x780

Subscription info here.

Wall St Journal Talks (hyper)Inflation

A reporter interviews John Williams about his views on the liklihood of inflation for the rest of this year (2009).

wsj_john-williams-2009-02-12

Here’s what’s interesting about this video:

1) John Williams is the respected economist who runs ShadowStats.com, a site that unravels manipulated gov’t statistics, like the CPI (Consumer Price Index). I’ve cited his work many times on this site.

2) The Wall Street Journal, one of the most widely-read and respected sources for business info, is now openly discussing both hyperinflation, the collapse of the US dollar AND its replacement, the Amero [WSJ Talks Amero]. Only one year ago this was considered wacko conspiracy talk. Now it’s going mainstream.

3) John Williams is expecting double-digit inflation THIS YEAR (2009).

4) John Williams says hyperinflation is possible this year and probable within 3 to 4 years.

5) He says once the largest-denomination US currency, the $100 bill, is devalued on par with toilet paper you must consider barter to provide for your everyday needs.

6) He suggests Scotch or other liquor as viable barter.

u-hav-no-idea-how-bad-its-gonna-git

UGLY: Inflation-Corrected Dow

This piece of ugliness is from Eric Roseman.

An incredible market development occurred recently as the Dow Jones Industrials (Dow) broke below 6,700 – its lowest level since 1997.

inflation-adj-dow-1900-01-01-to-2009-03-10_450x327

Stocks are now at the same level adjusted for inflation since 1966. Stocks have done absolutely nothing for your portfolio over the last 43 years and have badly lagged bonds and even T-bills.

 Should stocks crash another 50% from current levels – an unlikely event – that will put the Dow at the same inflation-adjusted level as 1929.

Amazingly, common stocks have gone nowhere since 1966 after including the consumer price index in the total return equation. The last time equities were in similar dire straits was back in 1982 when the same matrix saw stocks return a loss adjusted for inflation from 1966 to 1982. [more]

Of course, if you were to use John Williams’ “Shadow Stats” inflation statistics things would look even worse. (Since the Clinton administration gov’t inflation levels have been falsified to look better. Since 1990s inflation is under-reported by about 3%.)

cpi-2009-03

P.T. Barnum Inflation Launched Jan 20th?

Richard MayburyOne of my heroes, Richard Maybury, the “economic historian”, has just posted “Special Emergency Bulliten #8”. He talks about the “velocity of money” [explained here] and the possibility of hyperinflation.

Here is what I think is about to happen.

Obama is probably told every day that the world is being swept by fear, causing (money) velocity to plunge, and he is the only person who can do anything about it. He is the de facto president of the world.

I think Obama and his gang are preparing some kind of PT Barnum spectacular for his inaugural address January 20th.

If it works, (money) velocity will reverse, and we will go back to where we were August 07 through June 08—meaning the early stages of a runaway inflation, with non-dollar assets heading for the stratosphere. Gold, oil, copper, art, antiques, almost everything you can name will go to new highs within a few months, and the dollar will plunge.

If the PT Barnum spectacular does not work, (money) velocity will continue falling, and we will spiral on down into a depression. Non-dollar assets will collapse even further than they already have, and long term Treasury bonds will continue their ascent.

As far as I know, the only investment plan that minimizes the risk on both sides of this crisis is Harry Browne’s, which I have written about often.

I wish I could be more help. In the 4/07 and 6/07 EWRs, I wrote about the fall of the US Empire. Now I think it’s begun, and it won’t be any more fun than the fall of the Roman Empire was in 476 AD. Today’s economic chaos is just the economic symptom of this monumental event.

In short, the fall of the US empire is, I think, baked in the cake, as certain as anything in human affairs can be. The specific form it takes during the next two years or so will be determined mostly by Obama’s performance on January 20th.

A day or two after Obama’s inaugural, I plan to give my subscribers an analysis and forecast for what I think is coming. It will be posted on the Subscriber Access part of the web site.

But regardless of what happens, keep this in mind. We got into this runaway deflation through the stupidity of the demigods in Washington. Instead of firing most or all their ammunition at the deflation as soon as it arose, they fired a round here and there, never producing an improvement large enough to be noticeable to the general public. The lack of results, time after time, has demoralized the whole world population, causing velocity to drop further.

It’s been similar to trying to stop a brush fire not by dumping a deluge of water on it all at once but with one bucket every hour.

In other words, Washington’s emergency measures have made the emergency worse.

Expecting the new crew to do better would be naive, which I will explain in the January EWR. During his campaign, Obama promised “change!” but now he is hiring the same people who have roamed the halls of power for decades and who played no small part in creating this disaster.

The bottom line is, be ready for an even wilder ride than we’ve already had. Obama’s PT Barnum spectacular could send us in the direction of almost any conceivable fate.

Your next EWR is scheduled to arrive the first few days of January. And, again, look for my analysis and forecast for the results of Obama’s inaugural speech on the Subscriber Access part of the web site a day or two after January 20th.

Merry Christmas, and fasten your seatbelt.

Click here to see more posts by/about Richard Maybury.

Deflation Xforming to Inflation Soon

Richard MayburyRichard Maybury, one of my heroes, warns deflation is likely to turn into inflation sooner than most expect, perhaps before Obama is inaugurated Jan 20. Richard has been tracking something most poeple don’t: the *velocity* of money.

“The crisis began in August 2007 with a velocity-driven inflation, and about a year later turned into a velocity-driven deflation.

“As far as I can tell, the deflation shows no signs of abating yet. But, I think that when the turn back to a velocity-driven inflation does happen, it will be quick. We will see a V-shaped bottom, not a U-shaped bottom.

“I also don’t think the turn is very far away — weeks or days, not months. Obama is one of the most masterful showmen since PT Barnum. It may be that he will do a spectacular job of convincing the public that his economic team has developed a miracle cure, and the resulting wave of optimism will cause the turn in velocity. We’ll see.

“In any case, when I think the bottom has happened, I will let my subscribers know on the Subscriber Access part of our web site. No guarantees, but I’ll do my best to get it right.” [more]

Click here to see more posts by/about Richard Maybury.