That s a great point, Tom.

Transcription

1 Income for Life What Would Happen to the Mutual Insurance Companies that Administer Our Whole Life Insurance Policies If The Stock market Had a Big Crash? Hello, everyone, Andrew Dumais here, analyst at The Palm Beach Letter. I ve got Tom and Patrick Donohoe back, one of our Income for Life experts, on the line, to answer a common questions about a stock market crash. A lot of our readers have had concerns that the market is overheated now and it will soon correct, and they re wondering how that is going to affect the dividends that they get, since their mutual life insurance companies invest in stocks as well as bonds. Could you comment on that, Patrick? Yeah, I mean that s a great it s a great question, and it is a question we get quite a bit. And the best way to look at it is, is what s happened in the past. Of course, we can t and I wish we could predict stock market crashes; I think it would be a great resource. But most people have an idea of when it would occur, but they don t know the exact time. And if you look in the past at stock market crashes and what insurance companies were going through at that time, I mean insurance companies have always been paying dividends. So, looking at insurance companies, they don t have a lot of money invested in securities or equity-based investments. So, therefore, their portfolio is not going to adjust much according to a stock market crash. Look, we just had a stock market crash five years ago. Like the evidence is right there. You don t even need to ask this question, just look what happened. And guess what? Nothing happened. The life insurance companies just sailed right on through it, because they have nothing to do in stocks. Yes, they may earn a little bit of stocks, but the life insurance company invest in bonds and loans and stuff that s way, way safer than stocks. And they re not publically traded. It s really a stock market crash has nothing to do with the life insurance companies [crosstalk].

2 And another good another good point, and this is again, the actuaries and the guys that actually create these financial products are geniuses. And if you look at the trend that occurs during stock market crashes, people start to get rid of what they deem as the luxury items, or things that they could get by without. And guess what falls into that category? Their disability insurance, their term policy, their other insurance policies. It s been proven that when you have these crashes, those policies typically get cancelled. And obviously, if somebody s been paying premiums on those policies, and some coverage, that becomes somewhat of a profit center for insurance companies. Yeah, the Great Depression as well. These companies have all been in business through there, too. I think a more a better question to ask is, what would happen if there was a big economic collapse? Not necessarily a stock market collapse. What would happen if there was an economic collapse? And again, life insurance is not a cyclical business. It has almost nothing to do with cycles. People buy life insurance, as Patrick was just saying, for reasons other than how well do they feel. And so, these I mean you know, who knows what could happen in an economic collapse, but of all the places I would want to have my money, and there are a lot of different alternatives out there, the life insurance I would consider to be the absolutely safest. That s a great point, Tom. One proof of that, when you look at banks and how banks are regulated, and they have different tiers of capital, and they are regulated to keep specific types of capital, and their most liquid valuable capital is life insurance. Okay, here s a question. Patrick, if I were to tell you that over the next ten years, America would go through a situation much like the Great Depression, the worst economic collapse in the history of the republic, and you had to put your money in one of two places. You can either put it in a life insurance policy, by one of the mutual life insurance companies we use, or you could put it in an FDIC-insured back account. Which one would you choose?

3 Oh, yeah, of course, the former. Yeah, that s these are private contracts; they re private companies, limited regulation. Whereas banks, FDIC-insured I mean yeah, good luck. FDIC s proven not to be able to insure every single deposit not even a fraction of all the deposits. Yeah, it s like 1%, yeah. Yeah. And 500 or 700 banks went out of business in the last crash. Yeah, and the fractional reserve banking is what creates that huge risk and liability. Whereas with insurance companies, the cash value that they owe to policy owners, they have an equivalent amount in cash assets. And so, they don t participate in fractional reserve banking, and therefore are it s an extremely safe place to keep money. And how so, when was the last time that I life insurance policyholder did not get paid on their death benefit? Oh, it s in U.S. and Canada, it s never happened. It s never happened. There s been a lot of insurance companies that have gone under, or malinvestments and some other I mean AIG almost went under because they were participating in credit swaps and insuring mortgage-backed securities. But they would have been solvent to their policy owners had they gone under. So, yeah, it s because of how they re structure, they re insanely well capitalized, and there s not much of a problem with them going under. Unlike fractional reserve banking, Patrick, aren t they required to withhold at least a dollar for dollar for every policy out there? Yeah, they are. Not every policy; it has to do with their cash value. So which is essentially like a liability. Because you look at a bank, and a bank deposit to us is an asset. But to the bank, it s a liability, cause they have to pay that when we come asking for it. So, the same thing with the insurance

4 company. An insurance company, if there s a cash value, they owe that to the policyholder. So, if a policyholder says, I m done with my policy; I want my money, they re on the hook contractually to pay that back. So, looking at that liability, they have 100% backup of that liability with their cash assets. Whereas a bank, they re required to keep around 10%, sometimes even less. Yeah, mostly often less. Usually around six or seven. So, the only thing that could hurt a life insurance company is if both policyholders died at the same time. Well, that s another thing. I got that question the other day, which is, What if there s this plague that wipes out a percentage of the population? And I get this feedback every once in a while from insurance companies, because I ask them questions they ve never been asked before. And that was one the rep had never been asked before. But yeah, they went back and figured, you know, a 25 to 30% drop in population may eliminate the dividend, but it wouldn t hurt the insurance companies. That s a classic. Yeah. What about if there was some medical breakthrough, and human beings would suddenly now live 200 years? Oh, my gosh, that would dividends would go through the roof. And that s seriously, that s going to be happening. If you look at 3D printing, you look at all the different technologies that s on the forefront, you know, biotech, etcetera, it s inevitably it s inevitable. And so, that s just gonna do nothing but help the insurance companies. Yeah. Great. I bet that s going to make our readers feel a heck of a lot of better. So, I appreciate you both weighing in on that. And I mean, in that same vein, too, is there a way that maybe the Income for Life policies could actually be a benefit to our readers if the stock market were to crash, or, Tom, like you said, the economy kinda went south?

5 Yeah, as I said, I wouldn t want my money anywhere else except in one of those. And I ll be making my 5% compounding my money at 5% tax-free a year, while everyone else is having their savings chopped in half or Almost at the same time. I mean if you know what you re doing, look at now in hindsight and it s always in hindsight. You know, the opportunities are always evident in hindsight. When you go back to 2009 and 2010, look at the opportunities in real estate that existed. Look at the opportunities in buying blue chip or super strong companies at such low prices. I mean there s during these collapses, there s always massive, massive opportunities. The opportunities are only available to those that have cash capital. Right. And Income for Life is just the safest place to keep your cash, to keep your gunpowder safe, however you want to put it. It s the warehouse for your money that s way better than a bank. That s terrific, and I totally agree with you. I ve got several policies myself, so I ve seen the benefits, and I totally believe in it. I guess the one thing that we want to point out this case, then, is that, like you suggested, Patrick, this cash value that you built has a reserve. I ve even heard that there s an additional reserve on top of the dollar for dollar, so that there is truly no risk whatsoever. Is that true? Yeah, I mean, there s always I mean there s always a risk. I mean there s nothing that is completely riskless. But again, there s a saying that I was told about the insurance industry that, if everything went to hell in a hand basket, the only things left would be cockroaches, Twinkies, and mutual life insurance companies. [Laughter] That s great. All right, well, I thank you both for being on the program today. And next time, we re definitely going to look into another common situation and question that a lot of our readers have. So, please send in your questions, if we haven t yet addressed them, to feedback@palmbeachletter.com. Again, that s feedback@palmbeachletter.com. And we ll see you on the next webinar.

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