Wednesday, April 21, 2021

How Do Life Insurance Companies Invest?


Every so often I'm asked how life insurance companies invest their assets.  The concern centers around the safety of life insurance companies relative to what the typical consumer knows about banks and investment firms.

Can life insurance companies actually be trusted with your hard earned savings?  

Banks have FDIC insurance.  What do life insurance companies in comparison have to protect the assets and benefits promised to policy owners?

Let's start with the headline question:  

How do life insurance companies invest?

You can see from the graph above from the annual report of an A rated life insurance company that 76.9% of this company's portfolio of assets is held in Cash, Short-Term and Investment Grade Bonds.  Less than 1% is dedicated to Common Stock.  

In other words, life insurance companies do not bet the farm on speculative assets and once they invest in debt maturities like corporate bonds, they do not buy and sell.  Life insurance companies collect interest and then recoup the original principal.  Rinse and repeat.  Boring but safe.  

Also, quite effective given the performance history of life insurance companies in the United States through the Great Depression and too many to count economic crisis that have imperiled the savings of Americans held with bank and investment firms in comparison.

Furthermore, there are additional levels of safety to know and appreciate about the life insurance industry.

First, all life insurance companies are regulated at the state level (sometimes by multiple states) and audited by independent credit agencies to ensure they maintain 100% solvency at all times.  Industry average is 105% solvency meaning life insurance companies maintain more assets than liabilities at all times.

In comparison, the fractional reserve banking industry can lend the money you keep on deposit 10x over.  This is the reason traditional banks have FDIC to “insure” customer deposits and no such government entity exists for the life insurance industry.  Simply put, each life insurance company is 100% solvent at all times.

By the way, did you know FDIC insures over $10 trillion dollars in bank deposits with barely $100 billion dollars in assets? It doesn’t inspire confidence but that’s government planning for you...

Additional levels of safety exist.  Since all life insurance companies are regulated at the state level, if a life insurance company falls below 100% solvency, the state can take over and run the company until 100% solvency returns.  

In the rare case where a life insurance company cannot return to 100% solvency, other life insurance companies have historically taken over trouble companies by buying the book of business to ensure policy holders remain whole and contracts are honored.  This is done to ensure promises to policyholders are kept.  The life insurance industry operates based on trust and the industry knows there would be no reason to buy a life insurance policy if the public did not have trust in the system.

Finally, there is a last safety net. If no insurance company steps in to buy the book of business of a troubled life insurance company, there does exist a safety net provided by each state varying between $100,000 to $300,000 per policy.  

In summary, due to the strict solvency regulation imposed on the industry and safety nets provided by the industry. policy owners have the peace of mind knowing their hard earned savings held in an annuity or permanent cash value life insurance policy is safe in the hands of the most disciplined and trusted industry in the world.

How do I know this? Even banks park up to 25% of their reserves with life insurance companies.

My advice: Do as the banks do, not what they advise you to do.


John Montoya


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