Safety is a primary concern in any financial strategy taking a calculated, understood and informed risk is one thing, but exposing yourself to unnecessary risks, which could easily be avoided, is quite another. When it comes to money that you’re counting on and especially money you have worked so diligently to save, that expect to have access to during your retirement you better be sure it is stored in a safe place. But which places are safe? Massive amounts of advertising have conditioned us to store are money in banks both for short and long term storage, but are banks the safest place to hold your money? Rather than answer that question directly, let’s compare and contrast holding your money to bank versus depositing it with the insurance company via a permanent, dividend-paying, whole life insurance policy and then you can decide for yourself.
Let’s start by considering what the overall purpose of a bank or a life insurance policy is. There sole reason for existence is to make money, but who are they making money for? A bank’s primary responsibility is to make money for their stockholders so that they can get a return on their investment, after all, that’s why the bank was created in the first place, to benefit the stockholders. Stock-owned life insurance companies like AIG are also responsible for making money for their stockholders, just like banks they must keep their stockholders happy.
A mutually-owned life insurance company on the other hand is responsible for making money and providing a return for their policyholders, which would be, you. There are no stockholders in a mutual life insurance company to satisfy. Executives at banks and stock owned insurance companies are responsible to their stockholders which means they have incentives to take additional risk, they are, therefore, vulnerable to the pressures of maximizing short term quarterly profits in order to give a piece of the profits to stockholders.
The executives at mutually owned life insurance companies, however, have totally different mindset, they answered to their shareholders, who are policyholders because mutual insurance companies’ focus is to guarantee maximum benefits to their policyholders. They are not pressured to take risk to maximize the short term profits of any stockholder. This allows management to always have in mind the long term safety, security and return for you, the policy owner and shareholder.
An article in Forbes in December of 2008 clearly depicted the stark contrast between working for shareholders versus working with policyholders by stating “with their survival on the line, publicly traded insurers are scrambling for cash by cutting dividends and issuing new shares (diluting existing investors) begging regulators for a relaxation of capital requirements and lobbying Washington for a cut of the $700 billion dollar Wall Street bailout”, it goes on to say, their mutually owned rivals haven’t asked for a dime. Their statutory surpluses (the regulatory counterpart to book value) have help to steady or even increased. Some are announcing plans to pay out near-record dividends to policyholders. These might explain why certain mutually owned life insurance companies have payout dividends every single year for over 100 years, even during the great depression. Now, let’s take a look of what would happen if you had money deposited with the bank or mutually owned life insurance company that went under.
Assuming the bank is an FDIC insured bank and that your money is in a checking and savings account, money market account or a certificate of deposit, your deposits are insured by the full faith of the United States Government up to a specified amount. Since 1980, that amount has been $100,000 per depositor, per bank but was temporarily increase to $250,000 thru December of 2009 under the Federal Deposit Insurance Reformat of 2005; individual retirement accounts inside banks are also insured to $250,000. You maybe surprised to learn that the balance in FDIC is deposit insurance fund, which is the account that insures your deposit contains approximately just 1.25% of all the deposit it insures. Unlike banks that are regulated at the federal level, insurance companies are tightly monitored, audited and regulated by state insurance department, who require them to maintain adequate reserves on hand and meet their obligation.
In most state, if an insurance company begins to have financial difficulties, the insurance commissioner and the company’s home state, first steps in and take control of the company to try to help it regain its financial footing; if unsuccessful the company is turned over to the state insurance guaranty association. The guaranty association will either transfer the policies to financially sound insurance companies or they themselves will provide continuing coverage and benefits to the policyholders, similar to the FDIC, guaranty association will provide benefits up to certain limit, although it varies from state to state. Most state set basic of $300,000 in life insurance death benefits and $100,000 in cash surrender or withdrawal value for life insurance. So while there are safety nets for your money with both banks and mutually owned life insurance companies. It seems important and telling to reiterate the article in Forbes that states that “publicly traded insurers are scrambling for cash by cutting dividends and lobbying Washington for a cut of the $700 billion Wall Street bailout” while there mutually owned rivals haven’t ask for a dime and some are announcing plans to payout near record dividends to policyholders. Those facts speak for themselves.
By taking control of the banking process, you’ll soon be in a position to stop supporting the employee and shareholders or other banks and other finance companies to all interest that you paying to them and instead use that money to support you and your family. Taking control of the banking process will prove to be the wisest decisions of your lifetime. Contact a True Financial Age Advisor to learn more about this powerful concept.
