Banks and insurance companies are both businesses. As you channel money into them, they both have the power to shore up your resources and provide financial security for you as you move through life. Believe it or not, though, a life insurance company may be the wiser choice to grow a savings and/or investment portfolio with over time.
Life Insurance Longevity
Frequently Asked Question: “What assurance do I have that the life insurance company I’m with will still be able to pay claims years from now?”
According to one of our life insurance experts, Jerry Angel, life insurance companies may be safer to pour money into over time than banks. “If you take a look back, there have been over 1,100 banks that have gone broke since 2008. There have only been a couple of small insurance companies [that have filed for bankruptcy], and they may have had financial trouble to begin with.” He further says, “Every major insurance company has been around for years, some of them for hundreds of years… That means they’ve gone through The Depression, the world wars, the ups and downs of the market, and through 2008 without a problem.”
So, for this point, if you want assurance that the bank or life insurance company you’re building savings with will be there decades from now, look at their history. The ones who have been in business for the longest will have a strong financial foundation that you can have confidence in. Like Mr. Angel, you may find that insurance companies have withstood more economic blows than your local bank.
Reserve Power
Another reason that life insurance companies may be the safer savings option is that they are obligated to hold substantial monetary reserves.
“In order to keep their promises, insurance companies have to keep reserves,” Mr. Angel explains, “which are much stronger and much greater than what banks have to keep… If you say to the bank, ‘I want to see my $100,000 dollars,’ they’ll take you into a room and show you about $16,000. That’s really all the money they have to keep on reserve. If you ask them where the rest of your money is, they’ll say it’s in credit cards, home loans, or in the bank’s new marble floor.” Basically, banks can take the money they’re given and divert most of it elsewhere to keep their business open.
“If you said that to an insurance company, they take you to a room and all of your $100,000 will be there. They have to hold at least, dollar-for-dollar, everything they’ve promised you.”
Having this kind of capital in reserve helps ensure that insurance companies don’t overspend, overpromise, or otherwise destabilize their own business. And if they’re stable, you’ll be stable working with them.
Government-Regulated and Company-Backed
Insurance companies undergo strict government regulations that bank chains do not necessarily experience. For instance, insurance companies not only have to comply with federal management but state management as well. “In Texas, for example, there is a Department of Insurance that regulates the insurance company itself. If that insurance company is having problems [staying afloat financially], the state will take over that insurance company to either bring it to solvency or make sure it’s ok to sell it. If they sell it, they maintain the client base and transfer it to another company.” So, basically, the addition of laws and protections (per the state you live in) can help fortify the safety of your money and investments in the event of economic downturns. You may switch companies or carriers, but your money shouldn’t be lost.
Insurance companies have a vested interest in each other as well. “Every insurance company in a state insures each other. If a company is going bad, they will insure one another. Contrastingly, a bank depends on the Federal Department of Insurance Corporation (FDIC), which is supposed to insure every account. However, so many banks have gone broke that the FDIC doesn’t have [the resources to cover them all]. Consequently, it might not be as safe as people like to think.”
Bottom Line
So… are life insurance companies safe? Are they stable money-holding and investment avenues? Yes, they really are. Their longevity, how they’re regulated, and who is backing them makes life insurance companies safe.
Life Insurance Questions?
We hope that this information on life insurance compared to banks is useful to you.
If you’d like to learn how we can help you plan your retirement, call Empower Brokerage at (888) 539-1633 to speak to one of our Life and Annuity experts or leave a comment down below.
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This article was revised on 08/06/24.