The following is an email I sent to a prospective client with nearly $500,000 in bank CD's who was requesting assurances on the safety of his money if he purchased a contract (life insurance or annuity).
I’ve
attached an article I’d like you to read about the solvency of the Life
Insurance industry. (Here's the link: https://bit.ly/LMR-Report-How_Safe_Our_Life_Insurance_Companies)
Regarding
the FDIC, it has an interesting history if you study it. It was created during the Great Depression to
alleviate people’s fear for a “run on the bank”. Banks don’t keep the money you deposit in a
vault. They lend it out right away to
earn interest. Furthermore, banks have
the ability to create money out of thin air.
This is called Fractional Reserve Banking. Banks basically keep no more than 10% of your
money on deposit, lend the rest, and thru Fractional Reserve Banking can even
create more money out of think based on your deposit. (Sidenote: due to the pandemic the Federal
Reserve has actually lowered bank reserves to 0% meaning they don’t have keep
any of our deposits on reserve!)
Think of
how mortgages are created. Banks don’t
actually have the money but a signature on a mortgage note creates that money
out of thin air. Then people pay interest
to the banks on money that has never existed before. This is
the true definition of inflation (the creation of new money). Most people confuse inflation with the price
of things but that’s actually the end effect when there is too much money in
the system which forces prices up over time.
So FDIC
is a government created agency to backstop banks in the event there is a run on
the bank panic. However, the FDIC is
actually insolvent. It has maybe only a
$100 billion in assets and this amount insures over $10 trillion in bank
accounts across the US. That said, the government
could have the Federal Reserve print more money for the FDIC to bailout people’s
bank accounts so there is that. But for
assurances, think about a bankrupt government with an agency (FDIC) that does
actually have enough assets to provide a full reserve (that is restore all your
money in the event of a bank failure).
The
point is that FDIC is sticker of confidence and FDIC doesn’t actually have the
money. The government could make a
person’s account whole but if it actually came to that, the money would not be
worth as much because of the mass inflation it would cause with all the money
printing. On the positive, people trust
FDIC and government to back up a failed bank system and that’s a good thing. Otherwise, everyone would be running to get
their money out of the banks and that would be a very bad thing for the
economy. So it works but it’s built on a
very flimsy premise of trust.
You can
read more about how Fractional Reserve Banking works by reading a book called
The Creature From Jekyll Island. Great
book. You can find a link to the book on my website here:
The life
insurance industry in comparison puts the banking industry to shame because the
life insurance industry operates as a Full Reserve system.
By law,
all life insurance companies in the United States must maintain 100% solvency
(more assets than liabilities) at all times.
Industry average per life insurance company is 105%. That means if every life insurance company
had to pay off what’s owed, it would still have money left over to continue
business operations.
Also,
life insurance companies cannot create money out of thin air. They are inherently a safer place for money
because of this but because people don’t know how the life insurance industry
is regulated by law to be a full reserve system, people don’t think of a life
insurance industry as a place to park money when it absolutely should.
Since 100%
solvency is required by law for life insurance companies to operate, there is
no federal safety net like FDIC required for life insurance companies. In fact, no one who has ever purchased an
annuity has ever lost a dime. That is a
fact the life insurance industry goes to great lengths to ensure because the life
insurance business is based on promises to pay claims and benefits.
All that
said, each life insurance company has a state safety net of minimally $100,000 and
as much as $300,000 that works just like FDIC does for banks. Life insurance companies are regulated at the
state level which is why the government safety net is determined by the state
you live in. When you purchase an annuity,
you instantly have this safety net guarantee.
Hopefully
this gives you some food for thought. I’ve
included an article from Forbes which discuss the safety of the life insurance
industry here: https://bit.ly/Life-Insurance-Safety
Please let me know if you have any questions about
assurances or any other topic I can help answer. You can reach me at www.IBC.guru.
Thank you,
John
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