How safe is it? The big question insurance agents get when they start talking about using the cash value of the insurance policy for the Infinite Banking Concept is how secure the money is with a life insurance company vs the bank.

Because I have come to understand this is a big step for some and it makes them uncomfortable, is time to address the security of life insurance vs banks.

Q.  What happen if the insurance company “goes under”? The bank has FDIC insurance.

fdic

A.   Each state has a Life and Health Insurance Guaranty Association and they protect state residents who are policyholders and beneficiaries of policies issued by an insolvent insurance company, up to specified limits. This association is privately run is not a state agency. ND, for example, guarantees $100,000 of cash surrender and $300,000 of death benefit should their company “go under.” Be sure to check your states limits. Typically what happens here is a larger company will buy out the poor company taking on all those policies and keeping them going.

Banks are backed by the FDIC which guarantees $250,000. Should the bank fail this money will be paid to the account holder “as soon as possible.” Those who have less than the $250,000 will get paid when the banks assets are sold off and if there is enough money to do so. This as it says on the FDIC website “can take several years.”

Q.  How many life insurance companies “go under?”

A.  Here are actual numbers since 2008 showing how many banks closed vs life insurance companies

The bank information came right off of FDIC’s website.

Year

Life/Health
Insurance Companies

Banks

2008

7

25

2009

11

140

2010

4

157

2011

0

92

2012

0

51

2013

0

24

As reported in the December 2013 issue of the LMR the Crash of 1929 did not have the same devastating impact on insurance companies as it did on banks and investment firms. Only 20 of the 350 insurance carriers in operation, or about 5%, went into receivership. Even so, reinsurers honored all policyholder claims. Banks, on the other hand, had over 4,000 failures out of 25,000 banks, or a 15.5% failure rate, with a loss to depositors of $1.3 billion.”

Q.  Does the life insurance company keep my money on hand?

A.  Yes, in fact, the life insurance company is regulated by Federal Law that they must keep 100% of all deposits in reserves.

The banks are only required to keep 10% of each deposit in reserves. They are allowed to loan out the other 90% to others who come to the bank. By making a deposit into the bank you are loaning them your money so they can borrow it to others and make money off of it.

Q.  At least I know the FDIC has money. (comment we hear)

A.  As said in the blog Where Does the FDIC Get Its Money? By Lee Eugene Munson on seekingalpha.com Everyone understand that this money is not actually sitting in a bank account under the name FDIC? You just create more debt and hope the Chinese will keep buying it.”

From the U.S. Senate Republican Policy Committee Legislative notes we can see the money is being borrowed to pay to account holders of failed banks.

“FDIC – The substitute increases the borrowing authority of the Federal Deposit Insurance Corporation (FDIC) from   $30 billion to $100 billion, provides temporary authority to exceed the $100 billion threshold (up to $500 billion) for necessary circumstances, and makes permanent the increase in federal guarantee for bank accounts from $100,000 to $250,000 per account.”

Failed Banks

You can answer this question yourself, do they have money? You may get borrowed money “as soon as possible” as their website indicates.

Now, I did not compare this to the market because life insurance is not and investment and should not be confused that it is.

All of these concerns are the same concerns I had when I started using a whole life insurance policy for Infinite Banking because I was not aware of life insurance and how it worked. These are great concerns and they should be the concerns you have with your bank as well. After all more banks fail than life insurance companies, it is your money and you want to be sure it is safe regardless of where it is.

Please share other concerns and comments below and I will be sure to answer them. No one ever got hurt from doing too much due diligence.

Mary Jo