June 18, 2008

The Federal Deposit Insurance Corporation (we all know the FDIC) ran full page adds in national papers earlier this week with a picture of a $100,000 gold certificate and a penny. Their pitch — “Insuring deposits up to $100,000 without anyone losing a penny.” The protection provided by the FDIC is well known and publicized, and regularly used in financial planning, even by people of relatively modest means. Most of us know that it often makes sense to spread funds among various accounts rather than exceed the $100,000 limit to make sure there is maximum insurance coverage in the event of the failure of a financial institution. This insurance has proven to provide confidence in our financial institutions, even when there is a threat of financial strains. How different is the life insurance world!

In the life insurance world the existence of life guaranty or security funds is generally not publicly known. In fact, publicizing the existence of these funds by companies and agents is statutorily taboo! Even where information on these funds may be available, the burden is on the consumer to initiate the inquiries, and once located the information is complex and confusing with different limits and coverages state by state. Many, many decades ago, in a less controlled and less sophisticated financial environment, it was believed that allowing brokers or companies to mention the existence of guaranty funds would lead to the sale of cheap or non-existent life policies without concern for the financial stability (or existence) of the companies, hence leading to increases in fraudulent policies or life company failures. The time has come, however, to bring the life guaranty and security funds out from the closet into the light of day, and to have these funds be as much a part of financial and estate planning involving life insurance and annuities as the FDIC is for financial accounts.

To illustrate: Given the accumulation of wealth by baby boomers coupled with increases in longevity, more and more people are considering the purchase of annuities to insure that they do not outlive their means. Without knowing about the limitations of the life guaranty funds in your state (and with your broker or agent prohibited from telling you!), you might not even consider purchasing annuities from more than one carrier to maximize guaranty/security fund coverage. In New York, for instance, the limit of the life security fund for contracts issued after August 2, 1985 is $500,000 (there is no limit on contracts issued before August 2, 1985). Shouldn’t you know this before you place your life savings into the purchase of an annuity? Shouldn’t your broker be able – no, required – to give you this information? Shouldn’t information about life security be as widely available as information on Federal Deposit Insurance?

Who are we protecting by keeping this information in the closet?

What do you think?

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