Insurance companies dabble in different things – homeowners, auto, and health insurance are basically “pay as you go” – the money put into the insurance is quickly paid back out for claims – it doesn’t matter a lot what they do to invest\u00a0their money.\u00a0\u00a0 If losses go up suddenly (like a major hurricane), they can recover by raising premiums.<\/p>\n
Life insurance and annuities are an entirely different deal.\u00a0\u00a0 The money you pay into them might sit there for 30-50 years, and if there are financial problems within the investment portfolio, it can take a long time for that to show up.\u00a0\u00a0 Life insurance is the ultimate ponzi scheme.\u00a0\u00a0\u00a0 They could (in theory) be taking all the money and spending it or investing it in foolish things –\u00a0and only paying out the claims using incoming premiums.\u00a0\u00a0 That’s why it is critical for regulators (and insurance rating companies) to watch what insurance companies are invested in and make sure the company has the money to actually pay the claims in the future – but again, there is a 50 year in the future time line.\u00a0\u00a0\u00a0 To declare a major insurance company insolvent takes a lot more courage than what S&P just did.\u00a0\u00a0 People seem to assume and\/or believe that someone is out there insuring your life insurance policy or annuity.\u00a0 They aren’t.\u00a0\u00a0\u00a0 Only a small portion is covered by state insurance funds, and even that might not be paid, since there is no money or state government guarantee backing it – just a promise to tax the surviving insurance companies to pay to clean up the mess.<\/p>\n
So Life Insurance companies invest in things with very long time frames – things that nobody else would want to do.\u00a0\u00a0 They build office buildings, shopping centers, buy up pools of mortgages, and invest heavily in government securities like airports, toll roads, sports stadiums, sewage treatment plants.\u00a0\u00a0\u00a0 The investments are grouped by level of risk when the regulator\/rating agency\u00a0is trying to figure out if the fund is solvent.\u00a0\u00a0\u00a0 Something like US Treasury notes are very solid – you know you’ll be able to sell them on short notice – what an office building is worth is very hard to know, and they would be hard to sell during a financial panic without taking a big loss.\u00a0\u00a0 The downgrade of US Treasuries (if it sticks and S&P doesn’t back away) might force insurance companies to change what they invest in.<\/p>\n
So my conclusion is (as it was in 2008) – be very careful about taking your money and rushing into an annuity – you just might be running into the fire instead of away from it.\u00a0\u00a0 At least check out their financial situation and don’t assume that if they fail, you get your money back.<\/p>\n","protected":false},"excerpt":{"rendered":"
Insurance companies dabble in different things – homeowners, auto, and health insurance are basically “pay as you go” – the money put into the insurance is quickly paid back out for claims – it doesn’t matter a lot what they … Continue reading