Following the recent bailout/takeover of AIG by the government, other life insurance companies including Prudential are holding their hands out wanting a little of our tax money to soften the impact of their unwise investment in risky real estate loans.
Investment of premium dollars is, of course, one way that insurance companies can take small premiums and hold out the promise of large death benefits. But the truth is that this is more true in cash value policies such as universal life and whole life. Term insurance seems more self sustaining simply because of the anomaly I’ve written about before where most term insurance policies never get to the point of a death benefit because they are either lapsed by the insured or the insured lets the policy go at the end of the guaranteed term.
I can’t seem to find the article now, but if my memory serves me Prudential was asking the Fed for a little less than $2 billion to help defray the poor performance in their investment portfolio that supports cash value policies. I had a hard time wrapping my mind around the $120 billion AIG fiasco, not quite knowing what to think, but this one seems to me to be a case of companies trying to get off easy and not bother their policy holders about their goof up.
Keep in mind that this problem with their investment strategy doesn’t impact guaranteed policies, but it can be slam dunk detrimental to variable universal life and UL’s that rely on assumptions and not on guarantees. It seems to me that the appropriate thing for the company to do is to exercise its’ option to raise the rates on all of those policies to offset their losses. I know that makes me sound mean, but non guaranteed policies are non guaranteed for a reason. It allows for potential upside gains and it also allows for risk to hurt those who choose to insure themselves in that way.
Bottom line. I don’t think I agree with the AIG bailout, but I darn sure don’t think insurance companies need to start lining up to beg for help that they should be able to put together internally.