Protect Against Life Insurer Collapse

If you hold a universal life, whole life, or other life insurance policy with a substantial cash value, I suggest moving double quick to:

  • See if you would suffer any adverse tax consequences by borrowing against the policy.

  • If not, then borrow the maximum you can against the cash value, and…

  • Put the proceeds of the loan into an insured bank account.

This idea was also explored by Teresa Lo at InVivoAnalytics. The loan will protect some or all of the cash value of your life insurance against a complete collapse. If said collapse doesn’t happen, you’ll just repay the loan with a little bit of interest. If said collapse does happen, you’ll be happy to have gotten while the getting was good.

That’s where we’ve come, ladies and gentlemen.

Life insurers own some 40% of hybrid securities outstanding, which add up now to about $800 billion. If any government action results in reducing or wiping out the value of bank equity, the revaluation will zip through the line and take down life insurers as well. The mass run on insurers could overwhelm the amount of cash available and leave many policies worthless.

That’s why insurer credit protection is even more expensive right now than similar protection for the likes of Bank of American and Citigroup.

On this subject yesterday, David Goldman wrote at Inner Workings:

Leading the dive in the S&P; today is Hartford Financial, trading just over $4 a share at 11:30, which is to say down 94% over the past year. Bank of America is down 90%, and Citicorp is down 95%. Hartford is a fairly conservative organization. As a strategist for Credit Suisse and head of research for Banc of America Securities, I dealt with their portfolio managers and senior management regularly from the late 1990s to 2005. In 2004 I gave a presentation to the board on the use of credit derivatives, which Hartford viewed with extreme skepticism, even as a hedging tool. Where AIG wanted to be as cutting edge as possible (to the point of placing the edge against its own throat), Hartford was a serious and staid credit shop.

Hartford, like some other insurers, made the mistake of offering customers minimum payouts on variable annuities. Its exposure to bank capital paper is extensive, along with the rest of the industry. But in general the management of Hartford was prudent, even conservative. When firms of this sort get into deep water, that indicates the extent of systemic crisis.

The Obama financial team is too clever for its own good. It is creating circumstances that will make the next set of bailouts all the more expensive.

The biggest question in my mind is when President Obama will tire of Larry Summers’s much-vaunted cleverness and send Marine One to pick up Paul Volcker.

Even FDIC-insured bank deposits might not be safe, as the FDIC is on the verge of bankruptcy as well, according to Chairman Sheila Bair, but at least the FDIC has an existing $30 billion line of credit at the Treasury Dept. that’s in the process of being expanded to $100 billion.

The burning question is, “What if the government runs out of money?” Then all bets are off, and even those hoarding gold will be surprised to find it doesn’t actually work as a medium of exchange in time of utter crisis. If radio is dead air, lights are out, phones are silent, grocery store shelves are empty, and we go Mad Max prologue where the world has “crumbled and…the cities have exploded”; life has become a “whirlwind of looting and a firestorm of fear, in which ‘men began to feed on men,'” a few ounces of gold in your pocket won’t mean a thing.

Some say we’re heading there; I don’t.

However, I do think life insurance policies could be in danger and that borrowing against their cash value is a good way to guard against joining a long line of people awaiting tapped-out government money in the event of collapse.

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