Understanding Life Insurance Solvency – Episode 395

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[00:02] Hello partners and welcome to the podcast. Today we’re taking a listener question and this happens to be a topic that’s actually making the headlines all around the world, which is dealing with the changes in Congress. So Kim, are you ready to dive into this one? Absolutely. I’m always ready to go. Well, perfect. So this question right here is taken from the listener, one of the listeners and he’s stating that because of Congress’s willingness to obviously pass a bunch of legislation and we see what’s coming forward, they’re asking what’s going to happen about the insurance’s solvency and also asking about what are we going to be doing with these really low rates? And it’s quite a juggle here. So can you dive in with

[01:00] us on this? Absolutely. And this is something that we covered in our financial planning has failed book, which is free on our website at partners for prosperity.com. I want to say it’s around the middle of the book. We took a historical look at all of the various things that have occurred in the United States, inflationary periods. I mean, we went back even into the world wars and the myriad of health issues that have cropped up here, there interest rates high, low, sideways, tax rates changing, et cetera, et cetera, et cetera. And what we have seen over time, which our listeners have heard me say for years and years and years, is that the growth of the cash value of life insurance is long term. And I’ll come back to that always going to be two or three points above

[01:53] bank rates. So think about a bank savings account or a money market account at the brokerage. And those, as we know, are going to fluctuate with whatever the Federal Reserve is doing. And they absolutely will be impacted by inflation. And they will move the bank rates and the money market rates and the life insurance company’s dividend rates will move. Now, the reason that I focus on the long term, and then I’ll take a pause for a breath here, is that when you look at a life insurance company, they may not react as quickly. In other words, dividends are only declared once a year. So it may take a year or even two years for them to get where you feel like they should be to, quote, beat inflation. And yet, long term, you got to remember this

[02:48] product’s called the whole life for a reason. We want to own it our whole lives long term. And I’m only talking 20 or 30 years. I’m not even talking the 50, 60, 70, 80, 90 years that we need to be measuring for people. The life insurance growth, the cash value is going to beat inflation, at least on a long term basis. In other words, inflation may be at 11%. Your dividend may hang out at seven for a while, but we all know that those inflation numbers move around. And what is way more important is long term. Does the growth of cash value beat anything else? So I like to say it’s two or three points above bank rates. It may or may not beat inflation on any one particular year, but it will long term. Does that make a little bit of

[03:35] sense? It does. Yeah, it does make sense. And also, you’ve mentioned in other episodes, and maybe want to touch on this, the relationships of life insurance companies and the solvency and the reserves they have versus the insurance companies. Yeah. So you mean versus the banks or the brokerage houses? Correct. Yes. Yeah. Thank you. Life insurance companies are not federally regulated. That’s one really important thing to remember. And we forget it all the time. They’re state regulated. Furthermore, they operate on what’s known as a 100% legal reserve. In other words, if they say they have a dollar, they have a dollar. Whereas a bank says that it has a dollar, but it’s reserves. And this is very verifiable through numerous sources on

[04:26] the web, including at Federal Reserve’s very own site. A bank’s reserves are typically in the seven to 10 cent range per dollar, which is shocking when you think about it. And so if you look at our world and really, this is more US because whole life doesn’t really exist in any other country except for Canada. England used to have it, but they did away with it. The whole life companies, the mutual life insurance companies are the ones that fund all of the big transactions. So I know this from my days when I had and still do a lot of commercial real estate agents as clients. And when you see a big apartment sold or a big office building, the company that funds that mortgage is not usually a bank.

[05:24] It’s usually a life insurance company. And so the life insurance companies have these very large transactions, very long time frames, right, 20, 30 years. A lot of mortgages on the commercial side, 20 is the max. And so they are in a solvency space that is different, just like literally in a whole other world from the banks. And even the brokerage houses out there, I’m not as experienced in the knowledge of how a brokerage house, like a stock brokerage house reserves, like for its money markets. But I know we’ve done a podcast on what happens when a money market’s net asset value does not equal one dollar. It’s called breaking the buck. And it it does happen. And it means that your money market that you thought was safe is

[06:15] potentially not as safe as you thought. One of the follow up questions in this listener question that we got was was a sequence of different questions. Your points about covering the reserves and an insurance versus a bank is poignant. And so now the follow up question is about the paid up additions. And because of the uncertainty of the future, you know, be it inflation or whatever that may be, is the paid up additions going to be affected? Should a person be putting as much as they can or should they be holding off? What are your perspectives on that? The paid up additions goes straight into cash value. The same place the premium goes. And as we know, we need to remember with life insurance

[06:59] that premium builds cash value also. And so you always should have a goal to put as much paid up addition dollars in as possible. And that’s my goal doesn’t mean I can do it every single year, but I certainly try. And so, again, just remembering that the paid up addition, the actual contribution, the amount of money that you write a check for that goes approximately 95 percent to cash value. And approximately five percent to increasing the death benefit, which it has to do in order to protect all that cash value from taxes. And it’s still going to keep right on doing that. And it is interesting what the insurance companies are doing with that money. But that’s their problem. It’s not your problem per se, because let’s just go back to bare bones.

[07:48] What happens if they don’t pay a dividend now? We’ve not seen that in our lifetime, but could happen. OK, you’re still going to have a guaranteed increase of cash value. So not only is your cash value guaranteed, it’s guaranteed to increase even if there is no dividend paid. OK, so I think that clarifies, you know, the sequence of those questions and really the premise of this listener question again, for any of you on the podcast, if there are questions, please send them in to hello at partners for prosperity dot com so that we can either answer those on the podcast or if you want it more privately through email and amongst other books. But with that question, it really comes back to the uncertainty

[08:37] of the markets that’s happening. And I think a lot of people are are scared. And we should address that another in other podcast episodes. But it’s nice to hear from you and also to hear the industry. This long track record of delivering. Delivering is a great word. That’s just what the insurance companies do. And their job, their primary job is to benefit the policy holders, which are the owners of the companies. Again, a mutual life insurance company, not a stock life insurance company, stock insurance companies are publicly held, but a mutual company is held by its policyholders. And that’s who they protect. Well, thank you for listening to this episode. And Kim, thank you for addressing this listener question.

[09:30] Again, if you want to have your question on this podcast, send it to hello at partners for prosperity dot com. Thank you for taking the time to invest in your education with us today. Thank you for listening to the Prosperity Podcast to take control of your money and have it work for you. Visit us at partners for prosperity dot com. If you liked this episode, make sure you subscribe and leave a review.