How insurance differs from investments & why you should care
By Anne Allar, Allar Long Term Care Planning
Many Americans are having a crisis of faith with financial institutions, and it’s no wonder why. Look no further than the collapse of old-line Wall Street firms whose names used to stand for security and prudence. Then hear how many other companies are falling over each other to merge to avoid bankruptcy.
Anecdotes abound of consumers questioning whether long-term care insurance (and other kinds of insurance) is worth the paper on which it is printed. After all, in a world where formerly strong companies are going belly up, it’s understandable that a consumer would look at any promise made by any financial services with a jaded eye.
Insurance products and investments, though they may both be a part of a financial plan, offer the purchaser extraordinarily different benefits and risks. Stocks and bonds are issued by a corporation and their value depends on the financial health—perceived and actual—of that issuing company. They are literally a promise on paper made by the company to investors.
In the case of stocks, the promise is to share in company profits as the value of the company rises and/or dividends are paid. In the case of bonds, the investor is counting on the issuing company paying interest for the use of the investor’s money and returning the principal at the maturity date of the bond. In both cases, if the issuing company has
financial problems, it may be unable to pay dividends, grow the value of the company or pay bond interest and principal.
Stockholders’ investment value depends on the market having faith in the company. If the company fails, investors may receive nothing in return for their investment, and in fact may lose not just earnings but their original investment.
An insurance policy is absolutely a different animal. Insurance regulators require that insurance companies put aside money (called “reserves”) to help make sure that future claims can be paid. With many types of insurance, including long-term care insurance, these reserve requirements are one of the major reasons why the insurer doesn’t make a profit when a policy is first sold.
Just setting reserve requirements isn’t enough. Regulators also restrict how these reserves can be invested, to minimize the chance that aggressive investing could hurt the value of reserves and potentially jeopardize claims paying. It’s important that policyholders understand that their insurance contract is backed by more than just the promise and goodwill of an insurer. There is actually money put aside to make sure claims can be paid.
What if the worst case happens and an insurer becomes insolvent or is unable to pay its claims? Enter the state’s guaranty fund. Insurance contracts are regulated by the Division of Insurance (DOI) in the state where the contract was originated. For an individual policy, it is the DOI in the state where the contract was written; for a group policy, it is the state where the master certificate originates.
Prudent consumers understand the underlying promises inherent in financial vehicles. Otherwise, individuals, in their haste to protect themselves against future volatility in their investments, could throw the baby out with the bathwater.
Insurance offers guarantees backed up by reserve funds and guaranty funds. These funds offer security to long-term care insurance policyholders, annuity policyholders, life insurance policyholders and any other insurance contracts.
In a world of increasing uncertainty in so many areas, that’s a good reason to make sure a long-term care insurance policy is part of your financial plan.
Anne Allar, CLTC, of Allar Long Term Care Planning, is an insurance agent who specializes in long-term care insurance, and represents several leading long-term care companies. Anne is authorized to offer AARP endorsed products. Contact Anne at (617) 275-6171 or amallarLTC@yahoo.com.
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