Life Insurance

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One thing that I'm concerned about, but never see any reference to on any of these posts, is "What about our life insurance policies?"

When my children were young, I took out a small Whole Life Policy, thinking that it would help get my family financially through the crisis, in case I died while they were still dependent.

That was 17 years ago, I'm still very much alive, and my children are pretty much independent. Now I'm thinking of this policy as my "retirement", since I've always been self employed and won't have a company retirement policy waiting for me when I get older.

Suddenly it's become clear to me that if the country begins to have problems, the larger insurance companies may be some of the first to suffer. I don't know for sure, but I think that they are very heavy into real estate investments and stocks.

I've paid on this policy for 17 years, but the cash value is very small. If I cashed it in today, I would receive about 1/10 of what would be paid to my heirs if I died, or that I would receive when I reached age 65.

And, of course, if they go bankrupt next year, I'll never receive anything, ever.

Suddenly as I'm writing this, I feel like a dupe!! But I can't be the only person who has a life insurance policy, or these companies couldn't have become so huge! I've noticed almost complete silence on this issue...you don't hear anyone saying "Don't cash in your life insurance policies!" or even anything about their compliant status...I haven't received the seemingly obligatory note from them, assuring me that their computers will be able to handle the transition.....etc. etc. nothing.

What are some of the rest of you doing about your policies? Do any of you have any suggestions?

Margo

-- Margo (margos@bigisland.com), September 12, 1999

Answers

Seems to me that you should (a) hedge your bets, and (b) do some kind of risk-reward calculation -- in order to decide what to do.

Hedging your bets means NOT gambling everything you've got on one particular outcome. Maybe Y2K will be awful and bankrupt your insurance company, but maybe not. Presumably you've been making other plans and preparations for the "awful" scenario, but it might not be a bad idea to leave at least a few of your assets in the "not-so-awful" side of the balance sheet.

And in the case of your insurance policy, the "reward" if you cash it in now is, according to your estimate, only 1/10 the full payout that your heirs would get. Hardly a good reward!

On the other hand, the risk is that the insurance company will go bankrupt if Y2K is bad. If you think that risk has a probability of 100% of occurring, then you might as well cash it in. On the other hand, if you think that your insurance company is reasonably strong, reasonably conservative, and reasonably well prepared for Y2K, then you might as well keep the policy going. After all, it's not as if you need the cash in the first 90 days after 1/1/2000 (unless, of course, you get run over by a truck, in which case it's your heirs' problem!). But my point is that even if the insurance company is crippled by Y2K, and suffers losses for a few years, there's a chance (hopefully greater than zero) that they'll survive, and be in a position where they can pay off the full value of your policy several years from now when you depart this vale of tears.

Ed

-- Ed Yourdon (HumptyDumptyY2K@yourdon.com), September 13, 1999.


I think the prudent thing to do is to have enough money in the bank so that if you pay monthly for your insurance, at least you can pay a couple of months in 00. If you pay a yearly payment, I guess that is not a problem.

Personally, I only have disability insurance which is paid monthly from pre-authorized chequing and I plan on having this covered for at least two months come 2000. Who knows what will happen, but don't give your insurers an opportunity to deny coverage. My feeling is that if I have enough in my bank account to cover the usual monthly premium, I have done everything I could to keep the policies current.

-- Rick Reilly (rreilly@home.com), September 12, 1999.


From: Y2K, ` la Carte by Dancr near Monterey, California

Personally, I'd cash it and invest it in survival tangibles. If you have some spare cash, it might not be a bad time for those who have dependents to buy a term policy. There's a much enhanced probability of death, even in a big BITR that doesn't end up dislodging insurance comapnies (they're pretty hearty).

Perhaps the reason they're laying low is they really don't want a lot of people buying term about now.

-- Dancr (addy.available@my.webpage), September 12, 1999.


Margo,

What I did was exercise the loan provision of my policy for the cash value. My insurance co sent a check to me for that amount. I bought a few gold eagles with the check and stored them for future use. The minimum repayment amount is $10 per month. The policy is still in effect & will pay the full face amount, less the loan, in the event of my demise, to my heirs.

If the insurance co survives, I will repay the loan; either by selling the eagles or from future paychecks.

If the insurance co dosen't survive, I will have transferred some of my current wealth (small as it is)to the future in the form of capital assets.

Joe T, Sr

-- Joe Tietjens (joetsr@excite.com), September 13, 1999.


Margo

From what you are describing about your policy it seems to be the sort of "investment" that you let ride through Y2K. I would not cash that policy in if I were in your shoes. The payoff comes if there are no company busting problems. I would bet you have a better than even chance that your company survives Y2K. (After all, they don't depend on parts from overseas. They sell a promise.) Since it's a long term (I hope) investment with a very low yeild now, leave it in. But as another poster pointed out, you might want to make sure you have cash enough to pay your bills for a few months handy.

Oh, and I'm no finacial expert. The advice is based on what I have done.

Watch six and keep your...

-- eyes_open (best@wishes.net), September 15, 1999.



Dancr:

If you have some spare cash, it might not be a bad time for those who have dependents to buy a term policy. There's a much enhanced probability of death, even in a big BITR that doesn't end up dislodging insurance comapnies (they're pretty hearty).

As someone who has worked as an actuarial student, I can tell you that insurance companies maintain reserves calculated to allow them to pay out death claims based on expected mortality rates. If mortality is greatly increased, as it will be if we have anything beyond a small bump in the road, the insurance companies will be toast.

-- Steve Heller (stheller@koyote.com), September 15, 1999.


The "reserves" of insurance companies are "invested" in a mixed bag of things like commercial real estate, corporate bonds (debt), blue chip stocks, credit card debt, government debt. The ability to survive financially is also based on continued flow of premium payments.

If there is a large drop in markets around the world, there will also be a default from insurance companies. Insurance is like a legalized pyramid scheme, no room for all to get out at once.

Margo, one consolation to you. Your real purpose for this policy was to cover your kids if you died young. Congradulations on never exercising your policy!!!!

-- Thom Gilligan (thomgill@eznet.net), September 15, 1999.


Margo,

If the past is a guide, the insurance company will pay off even in a depression. To the best of my knowledge, all death claims were satisfied in the 30's and 60-70's. When insurance companies have failed in the past their policies were transferred to surviving companies by either governmental authorities or agreements among insurance companies who have always felt it was in the industry's interest to make good on policies. You would have to expect an unprecedented disaster to think we will have a different result this time. Perhaps you are but I am not.

If you are concerned, you might think about cashing your whole life policy and buying term insurance. Whether this makes sense for you depends upon your age and state of health, but it might be a way to cash out and still keep the coverage.

-- mike (maples@voy.net), September 16, 1999.


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