David H. Kinder, RFC®, ChFC, CLU
Recent Bank Failures and You
Lots of panicking headlines over the past few days about Silicon Valley Bank and Signature Bank. Should you be worried? And are other agents right to compare insurance contracts to banking accounts?
First, this is negative news and negative news will impact the stock market. So that's an automatic 'ripple' effect that may impact your investment portfolio. (Btw, positive news can impact your investment portfolio in negative ways too - sometimes you never know how the market will react to news.) Second, if you are a depositor or account holder at the bank, your money is safe within FDIC limits. Now, FDIC limits are NOT per person, but per account titling. Joint accounts are covered up to $250,000 and is covered separately from individually owned accounts. This is the link to the FDIC to help answer questions regarding deposit insurance and coverage: https://www.fdic.gov/resources/deposit-insurance/index.html
Third, what about loan servicing? If the loans were underwritten with sound underwriting (not "sub-prime lending"), some other institution will assume those loans and profit from them.
In the meantime, access to credit lines may make things harder for businesses with loans and lines of credit from these institutions. There may be ripple effects on that, including business closures, vendors not getting paid, employment terminations, and more. THIS is the scarier part of all this news and can have far reaching effects beyond just their local community.
Fourth, why did these banks fail? I *believe * (because I am NOT an expert in these matters) it was an issue of reserves invested in the bond market... and the bond market making their (negative) moves lately. In the case of Silicon Valley bank, they were trying to raise about $2 billion for more reserves, but simply ran out of time. This was all about their balance sheets and government mandated requirements for reserves compared to whatever else they need to maintain compliance as a regulated financial institution.
Think about this quote from the book "The Millionaire Next Door":
"We [the lenders] own it all… all of it. The business out there?… You [borrowers] just run these businesses for us. You guys run them for us, the financial institutions."
Think about that quote. That's how far reaching a banking failure can reach. It can impact many people, even and including those who don't do business with that particular bank.
Can insurance contracts be helpful here? Yes... and no.
First, it depends on your own financial situation. If you are a "Debtor: Spend and Repay" (see image below) mode in your business and life, insurance won't work for you. With insurance contracts, you need to fund them first before they can work for you. And generally speaking, life insurance companies don't like the idea of borrowing money to fund a life insurance policy either. Just keep in mind that over time, with the amount of interest charged, you're really borrowing your own money. You're just borrowing your own money in advance before you earned it.
This simple illustration outlines the point. The black line is $0. You go into debt and you repay it over time... and unless you break that cycle, you simply repeat it over and over again.
Now, if you're a "Saver: Saving to Spend"... insurance can do better for you because you already have better financial habits. While it's certainly a healthier way to be financially, you essentially are in the same boat as the debtor: back to zero after you spend what you saved.
With the way you can borrow against life insurance policies through collateralized loans and lines of credit (I try not to use the language of "Infinite Banking"), you can engage in what could be termed the "Wealth Creator Model":
You fund the policy (and continually fund it) and you use it as collateral to take care of the things you need to take care of. The policy continues to grow (because it earns interest and/or dividends), you are continually funding it according to the terms of the contract, and it's always available to borrow against for emergency or opportunity (subject to existing loans, any collateral assignments, and a maximum amount allowed set by the insurance company or 3rd party lender).
Now, to be clear, different policy designs will require different structures, so not every policy will look the same from one to another to maximize its benefits. Having one as a source of collateral for emergency or opportunity, I believe is a very prudent and sound decision.
How safe are life insurance companies? From this link: "How Safe Are Life Insurance Companies? If the life insurance company is a legal reserve life insurance company, the answer is very safe. Under the legal reserve system, a life insurance company must have a policy reserve fund into which a large percentage of each premium dollar goes. This fund is the method by which a legal reserve life insurance company determines the assets it must maintain in order to meet its future commitments under the life insurance policies it has issued."
There are far more resources and links on the American Council for Life Insurers website here: https://www.acli.com/