By Erik Brenner
You have a life insurance policy with an established company, and you feel good about the protection it provides your family. But then you hear that the company which issued your policy sells a big block of one of its business lines to another company, a reinsurer. You also hear that the deal was made so the company’s balance sheet would look much better, releasing hundreds of millions of dollars that had been held in reserve to support those policies. Should you be concerned? Are there some steps you should take to make sure your policy is still in good hands?
The most important thing policyholders should do when they have life insurance is check on it regularly. So many people just assume it’s going to be there when and if they need it. And, for the most part they are right. But why not check on it regularly to make sure it is still with the company from whom you purchased it, and if not, is it with a firm in good financial standing.
Most advisors will tell you there is probably nothing to worry about. It’s a fairly routine process for one life insurance company to transfer risk to another, completely different company. However, if the company transfers the risk via a related or subordinate company, then there are some different questions you should ask. It raises some uncertainty about the assets supporting the reinsured book.
The first question you should be asking is really a question you should ask regardless of the situation. It becomes even more important when the company transfers liabilities to itself. That question is about the company’s history. Is this a company that has had problems in the past? Is it a firm with a good track record? Does it have enough cash reserves and liquidity to payout its book of business in a worst-case scenario?
You can also check on the company’s ratings. Independent agencies rate insurance companies on their financial strength. A.M Best, Fitch, Moody’s, Standard & Poor’s, and the Kroll Bond Rating Agency all provide ratings that you can evaluate. You can also check your insurance company’s website to see if they published their ratings.
Another question you can ask will involve more research and you may want to ask your advisor for some help with it. You’ll want to fully understand how the issuing company is investing its assets to support the guaranteed value of your life insurance or annuity product. What risk are they taking to give you that return? If your product is partially guaranteed due to a reinsuring arrangement, it may be a reason for concern. But again, it may not be an issue at all.
You should also know that all 50 states have laws in place to protect consumers when insurance companies become insolvent. They require licensed companies to pay into a guaranty association that will provide funds to policyholders if a company goes out of business. The American Council of Life Insurers provides details on these associations. However, there are limitations on those payouts and if you have policies with larger payout amounts you will not receive the full payment. Most states limit death benefits to $300,000. Annuities are also covered by state guaranty associations, but the amount of coverage varies from state to state.
If you do the research and decide to exchange or transfer your existing life insurance or annuity policy it can be difficult. Depending on your age and health, a new life insurance policy will likely be more expensive. If you’re thinking about dropping a permanent life insurance policy, you could possibly recover the cash value but will likely pay a surrender fee. You can transfer the policy to a different company, but that is contingent on the policy contract. Again, there may be fees associated with your age and health, and there may be transfer fees. You could also stop paying the premiums and let the policy lapse. If there is any cash value, you could transfer it to a different financial vehicle that is not insurance related.
Most advisors would recommend leaving the policy in place, even if you have some concerns about a company’s liquidity issues. State regulations will protect you for the most part, and the costs involved with making a switch can be steep.
The Federal Reserve Board has already said it will keep interest rates low for at least a few more years. That low interest rate environment is forcing life insurance companies to seek more aggressive investment opportunities and reinsurance deals. Life insurance policyholders are likely going to see more of these deals in the next few years.
About the author: Erik Brenner
Erik Brenner is the president and founder of Hilltop Wealth Solutions in Mishawaka, Ind. He is a certified financial advisor who has been in the business since 1993, and he believes strongly in a holistic approach to financial planning. Brenner is also certified as a national social security advisor and he hosts a weekly TV show called “Your Wealth Health” on the Fox affiliate in South Bend, IN.
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