Are Insurance Companies A Safer Bet?
Life insurance companies, on the other hand, have much stricter requirements regarding the cash reserves that they maintain. By law, life insurers in all 50 states must have at least one dollar in cash reserves for every dollar of premium that is issued in the form of annuities or life insurance.
In other words, life insurers must keep at least 100% of their ‘deposits’ as minimum reserves. Many insurance companies go beyond this, maintaining a reserve surplus above 100% so they can make good on their guarantees to policyholders.
Of course, the life insurance industry cannot print more money. But for all practical purposes, it doesn’t matter because life insurance companies have the CASH.
Furthermore, there is no limit on the amount of money that is backed by cash reserve.
Many life insurance companies can accept purchases for even millions of dollars. However, they must be able to track the source of money to ensure that it came from a legal venture, and of course, no money laundering activities.
FDIC for Insurance Companies
What if a life insurance company was to become insolvent? Then reinsurance companies would step in and cover policyholder losses up to a certain amount.
Although the exact amount can vary by company, state, and situation, the limit is usually quite high, such as $300,000. In the State of Florida, any Annuity sold is insured by the State up to $250,000.
If an investor had a million dollars to invest they would need to spread their money out among several banks in order to make sure that it’s all insured. One, of course, could do the same with an insurance company. However, alternatively, they could put the entire $1,000,000 with a life insurance company and enjoy the guarantee of dollar-for-dollar cash reserves backing the entire amount.
The life insurance industry has held this record with success for hundreds of years.
So, if the bottom falls out of the economy, or our economic system otherwise fails, which institution would fare better? The answer to that would probably depend heavily on the specific factors involved in the fallout and how the public reacts to it.
But, in our opinion, most serious financial experts today know that in the end, your money is pretty darn secure with a life insurance company.
Finally, if you think that banks or Treasury securities are the only place to put your money, think again. It would most likely take the end of the world as we know it for the insurance industry to fail, with its trillions of dollars in collective cash reserves. Remember, insurance companies already have the CASH!
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