Ken Himmler.com

We have seen quite a bit of financial destruction and deception from the banks and the large financial institutions. Many people are starting to questions will we have the same fallout with insurance companies. Many of you know that I attended a conference in the beginning of January to learn more about the state of the insurance industry. At that time I listened to the insurance company executives talk about the problems they were going to have. Their problems were not so much centered on losing business but more of too much business. Many of these executives were worried with the crash of the stock market and the low yields on CDs and bonds people would flock to annuities in unprecedented numbers.

They were concerned with not only how they would handle the investment of all the influx but how would they handle the necessary staff needed for all the additional business. It seemed as though the general contention was to put a limit of the amount of business that they would accept. They also talked about reducing some of the benefits to reduce the amount of inflow. In the last two weeks we have now seen quite a lot of change from the insurance companies. Here is a small list of some of the changes some of the big players are making;

1) Reduction of maximum issue age they are willing to accept.
2) Reduction in the amount of maximum investment by any one person or family.
3) Reduction of the upfront bonus. Example: A certain company reduced their upfront bonus from 10% to 8%
4) Reduction in the cap on the annual earnings.
5) Reduction in the rider benefits. Example is: A certain company was giving a 8% guaranteed income rider for 10 years. They have now reduced this to 5%
6) A limit on the total amount of the business they will accept: Example: A certain company had set a limit on the amount of new money they would take in 2009 to nine billion. They hit six billion in the first three months of 2009. They are now setting monthly maximum limits. The problem with this is we just wait in line and send in the money and they may send it back because they have hit their maximum.
7) Only new money accepted. One of the costs of the annuity company is when they will facilitate the moving of money from brokerage accounts, Bank CDs, or other annuities. Some of the larger companies are now putting this task on the client and will only accept an annuity application with a physical check.

I felt it important to update everyone on this recent development. My opinion is that in today’s environment of low CD rates, volatile markets and unknown economic horizons annuities still play in important part of a pre-retirement or retirement plan.

In your lifespan you will encounter three phases. The accumulation phase, the pre-retirement phase and the retirement or distribution phase. Annuities play an important part in the pre-retirement and the distribution phase. I am still a big believer that only under certain circumstances should annuities be used for younger people – ie in the accumulation phase.
 

The government’s bailout money is not up for grabs. Large insurance companies that qualify for the government’s bailout money have made applications. So far Hartford life, Prudential and Metropolitan are some of the ones that have made the application. They may be eligible for billions that may help bolster their corporate bond positions. Most insurance companies make money on the spreads that they get from buying corporate bonds and government bonds. Just like a bank makes a spread on the money they payout on Cds and savings accounts versus the amount they charge on loans. Insurance companies make money the same way – on their portfolios.

The problem was when the recession – depression hit many companies either stopped their interest payments on their bonds or outright defaulted. This has put a crunch on some insurance companies that may have been leveraged to highly. This new seed of investment help from the government should help these companies buy up more corporate and government bonds. While it still makes sense to have insurance companies as a part of an overall investment plan it also makes sense to diversify between different companies and different insurance products. You also want to check your state to find out what the actual coverage is in case an insurance company does go into receivership. As an example in Florida the amount each person is covered for is $100,000 for an annuity contract.