Financial Crisis May Threaten Life Insurance Policies

As the financial markets continue to shake or collapse under the weight of the current economic crisis, many investors are looking to the federal government to provide protection for their money. With bank account kept secure by the FDIC, and money market funds now brought under the protective wing of the Treasury Department, many are beginning to wonder about another important sector: insurance.

How are life insurance policies and annuities being safeguarded? Currently, they are backed by state guaranty associations. The only problem with this arrangement is that most of the states are running low on available funds and are entirely reliant on the good faith promises to pay made by the major life insurance companies.

Why is this situation a problem? It is comes down to stock prices. Many life insurer stocks, which were traditionally immune to the fears and uncertainties that rocked other sectors in recent months, are now experiencing direct hits. In some cases, stocks have dropped nearly 50% of their value in the last two months alone. Met Life is just one company that has reported a $17 billion decline in debt investments for the third quarter of 2008. This problem has been exacerbated by the sales of variable annuities that come with guaranteed-income features by a number of insurers.

The system has managed to stay afloat despite the threats to its security. Yet, this could change. Insurance companies may not share the danger of immediate collapse like banking institutions, but they can fail, albeit at a much slower rate. Once an insurer does go belly up, state regulators come in, sell of what they can of the company’s assets, and then bill other life insurers still operating in the state so policyholders are protected.

The other problem is that many maintain the assumption that only small insurers will be likely to fail and not more than one at a time. With the double loss of Lincoln Memorial Life Insurance and Benicorp Insurance in 2007, there may be signs that the insurance markets are being further weakened, but may manage to make it through the current financial dilemma plaguing the nation.