Banking crises got you worried about your life insurance company? Here’s how to do a wellness check.
With the rat-a-tat teetering of Silicon Valley Bank, Signature Bank and Credit Suisse in March, perhaps you were among those double-checking account balances to make sure your accounts were under the $250,000 ceiling for Federal Deposit Insurance Corp. coverage.
But what about when it is that other “set it and forget it” investment that is wobbling — life insurance and annuities? In many years, individual life insurance carriers hit insolvencies that trigger payments by guaranty funds (like the Connecticut Life and Health Insurance Guaranty Association) to beneficiaries under state receivership, with caps of anywhere from $100,000 to $500,000 depending on the policy.
It can happen in Connecticut, with six domestic carriers having succumbed since 1990, according to the National Association of Insurance Commissioners, not including others based elsewhere that sold policies here. Gerald Goldberg, CEO of GYL Financial Synergies in West Hartford, gives us an overview of what to think about when gauging the stability of an insurance carrier.
How do bank and insurance carrier crises differ?
If you think about insurance companies, they are asset and liability matching specialists — that’s what they do. They have their actuaries, and other subject-matter specialists figure out which lines of business they are going to pursue; and then focus on having sufficient combinations of premiums and returns to be able to cover those future outflows when there are claims.
There have been a number of initiatives that were undertaken after 2008 by the National Association of Insurance Commissioners, including the Solvency and Modernization Initiative, that undertook a critical self-evaluation of the United States’ insurance solvency framework. This included the consideration and update of key issues such as capital requirements, risk management and governance, financial and statutory accounting. In other words, they were very much on top of this.
How can one check the financial stability of their carrier?
There are rating agencies that independently assess and evaluate the financial strength of the insurer. Examples are Standard & Poor’s, Moody’s Investors Service, Fitch and A.M. Best. If I were looking to become a policyholder or was an existing policyholder, I would want to focus on doing business with carriers that are more highly rated. When you are talking about insurance, you want to do business with carriers that have at least a single-A rating.
Connecticut has a fairly robust Insurance Department (tinyurl.com/ctinsurancedepartment) that’s proactive and they actually have a fairly user-friendly website. If there are questions or concerns, they’re responsive.
Can annuities be moved between carriers if a better option surfaces?
Generally speaking, you can roll over the proceeds of one annuity into another annuity offering. The Internal Revenue Code Section 1035 allows you to transfer the funds from one annuity to another without having to pay income tax on the annuity. That said, while there are ways you can exchange annuities, whether to proceed with such a transaction necessitates a deep dive into what you may be forfeiting in the old annuity and what other features, benefits and additional expenses may be in the new product you are considering. Doing your due diligence and understanding exactly what you want to use the annuity for — that’s critical. In 2022 the sale of annuities hit record levels, prior to inflation and the Fed’s rate actions. The appetite really started to increase in the low-interest-rate environment, because people were saying, ‘I can collect 3 or 4 percent on a fixed rate annuity, as compared to having my money in another conservative investment.’
A fee-only wealth advisor is one option available to you who can provide you with objective advice, and is not going to be incented to steer you in one direction or another. I’m not saying that there are not ‘do-it-yourselfers’ that can’t do a good job of due diligence on this, but it is really an undertaking on two levels. One is at the company level — understanding the stability of that organization, not just from a financial stability standpoint, but also from a customer service perspective and how they are at processing claims.
And then separate and apart, you must do your due diligence on the actual product — the insurance you are being sold. What are the fees and commissions? What are the surrender charges? What are the mortality and expense risk charges? What are the administrative fees? What are the riders? If there are additional bells and whistles, some of them might be really valuable, and some of them might be less so.
They all come with expenses and complexity — unless the person is really going to take the time to become conversant with these concepts … they should be working with somebody who understands these concepts and can walk them through the pros and cons.
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