Both Sides, Now . . . and Later

Both Sides, Now . . . and Later

Angel HairI’ve looked at life from both sides now from win and lose and still somehow it’s life’s illusions I recall.

I really don’t know life at all.

August 29, 2014 – Almost fifty years ago, a blossoming 24-year old singer songwriter just a few years removed from her Saskatchewan homeland, wrote a song which would go on to rank, at No. 171, among the greatest songs of all time according to Rolling Stone.

Joni Mitchell says she drew inspiration for “Both Sides, Now” while on a plane reading Saul Bellow’s Henderson the Rain King and looking out the window at the clouds.  But I’m not convinced she wasn’t actually reading a copy of Vaughn & Vaughn’s Fundamentals of Risk and Insurance instead.

(Stay with me. You’ll understand the connection in a bit.)

After all, insurance is all about risk management and people paying money for protection.

They pay money for a life insurance policy that promises heirs will be compensated should an untimely death occur;

They pay a lump sum of cash in exchange for an annuity which promises guaranteed future lifetime income to protect them against the risk of running out of money in old age.

But before handing over any sum of cash for something as seemingly nebulous as an insurance promise, safety minded consumers usually need a key question answered first:

“How SAFE is my money?”

In a word, “VERY!”  

Even if we limit our focus to the worst financial catastrophe in recent memory, the Great Recession years of 2008-2011, you can’t help feeling secure about the safety of your purchase after considering these few facts:

FACT No. 1:  According to the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA), only 8 life insurers were placed in liquidation during this time.

FACT No. 2:  Compare that to the 415 bank failures occurring during the same time period according to the Federal Deposit Insurance Corporation’s Failed Bank List.

Yet despite a superior track record, many people still avoid life insurers because they perceive banks to be the less risky choice.  These folks, like the song says, “really don’t know life (insurance) at all.”

This is where we circle back to Joni Mitchell because one of the most under-appreciated realities of life insurer’s business model lies in how they manage their risk.

Few people take the time to realize that life insurers, quite literally, look at life from both sides, now!  At least their actuaries do.

Consider this:

Every term life insurance policy is effectively a “bet” between you and the life insurance company about how long you will live.

That risk is priced according to the actuarial projections (i.e. “odds”) of you living beyond your normal life expectancy (NLE).

Same is true with annuities.  Except in reverse.  Here, you are betting you will “beat” the odds and live beyond your NLE.

But either way the life insurer’s chances of solvency (or, honoring their promise to you) are enhanced because they have you covered on both sides.  This is a big plus for consumer security.

Think about it:  For every life insurance policy that’s a “win” for them (i.e. they don’t have to pay out any death benefit proceeds) because a person lives longer than projected, there’s another person in their pool with an annuity who also lives a long life and the insurer “loses” because they are obligated to keep paying benefits.

In a way, the life insurer is “betting” on both teams where both teams win!

Extrapolate this across a large enough pool of policyholders underwritten by a highly rated life insurer with years of experience and you have a reasonably good assurance the life company will deliver on its promise.

In other words, your money is safe.

CAVEAT Understand that this general information does not extend to every single insurer and consumers still need to do their own due diligence on the solvency and viability of any individual life insurance purchase.  But as an industry, it’s got a great track record.

So whether you’re considering a structured settlement, retirement annuity, life insurance policy or any of a host of other offerings from this stable industry, remember how good your chances are.

Don’t let the clouds get in your way.

Comments

Finn Financial Group