What assurance do I have that the life insurance company I am with will still be in business and able to pay a claim years from now.
That’s a really good question that is asked a lot. People ask all the time, “Are life insurance companies safe?” Personally, I think that insurance companies are a lot safer than banks. If you take a look back, there have been over 1100 banks that have gone broke since 2008. There have only been a couple of small insurance companies, and they may have had financial trouble to begin with.
Every major insurance company has been around for years, some of them for hundreds of years. We’re talking about since 1880 or 1867 or something like that. So that means they’ve gone through the depression, world wars, the ups and downs of the market, and through 2008 without a problem.
Insurance Companies Are Not in the Reserves
Insurance companies can be very safe and here’s why: they aren’t part of the reserves. In order to keep their promises, insurance companies have to keep reserves, 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 a new marble floor in the bank. Basically, 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 for everything they’ve promised you.
Insurance Companies Are Regulated and Backed by Other Companies
Insurance companies are highly regulated- not to say that banks aren’t – but they’re regulated by the states themselves. For example, there is a department of insurance that regulates the insurance company itself. If that insurance company is having problems, the state will take over that insurance company to either bring it to solvency or to make sure it’s ok to sell it. If they sell it, they maintain the client base and transfer it to another company. So, the insurance company not only has the reserves, but it is also state regulated.
Next, 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. The FDIC doesn’t have any money because they are bankrupt themselves, and any money used to save any accounts comes from the federal government. This is safe, but it can also contain a lot of red tape and time delay. Consequently, it might not be as safe as people like to think.
Bottom line: are life insurance companies safe?
Yes, they really are. Their longevity, how they’re regulated, and who is backing them makes life insurance companies safe.
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