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Is Your Life Insurance Policy Safe From Government Greed?

It looks like the Government may be getting itself deeper into the banking and insurance business.

But, this is nothing new. The Government has been getting itself involved in the economy for quite some time now, and it's getting to the point where people are starting to realize that this is pretty serious. It's affecting your retirement, your job, your savings, and everything else important in your life.

My friends at Simply Capitalism have "revived" an old classic to illustrate the point perfectly. It's from Henry Hazlitt's book "Economics In One Lesson", and if you have the chance, it's definitely worth the read. In it, Hazlitt makes an incredible prediction:

The case against government-guaranteed loans and mortgages to private businesses and persons is almost as strong as, though less obvious than, the case against direct government loans and mortgages [for homes]. … Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required, inevitably mean more bad loans than otherwise. They force the general taxpayer to subsidize the bad risks and to defray the losses. They encourage people to ‘buy’ houses that they cannot really afford. They tend to eventually to bring about an oversupply of houses as compared with other things. They temporarily overstimulate building, raise the cost of building for everybody (including the buyers of the homes with the guaranteed mortgages), and may mislead the building industry into an eventually costly overexpansion. In brief, in the long run they do not increase overall national production but encourage malinvestment.

Keep in mind that this was written over 60 years ago and yet it sounds like it could have been written maybe 6 months ago. While many of the talking heads on the news are busy blaming Capitalism for this financial mess, it is the Federal Reserve (and its ability to manipulate interest rates) and the thousands of regulations that bind the financial industry (and manipulate banks to make loans through the community reinvestment act, the affordable housing program, etc.) that have made this financial crisis possible.

Yet, none of our political leaders saw this coming? It's a shame nobody listened to Hazlitt then. Every 10 years or so when a recession rears its ugly head, our political leaders have yet another opportunity to face the reality that centralized planning by the Government doesn't work. And, every recession those same political leaders ignore reason, facts, and logic.

They're convinced that the free market, not the Government is to blame. Yet, they all ignore the fact that none of these loans, and the securitization of these loans, could have been done without The FED, Fannie and Freddie, Barney Frank, Bill Clinton, George W. Bush, and all of the many regulations that forced banks to make unprofitable loans and incentivized incompetent CEOs to run these institutions.

John Allison - former Chairman of BB&T - does an excellent job of explaining the financial crisis.

But, what does any of this have to do with your insurance or annuity policy? Well, it could potentially have a dramatic affect on your future depending on what happens in Washington over the next few years.

For example, you might find that after 20 years of saving money, the Government begins altering your contract. Why would they do that? They probably wouldn't, unless insurance companies became crippled to the point where they could not pay their claims or raise enough capital when necessary to pay claims.

And, that could realistically happen with all of the sweeping new changes taking place in the industry. For example, it has already happened in the banking industry - the Government has crippled it, and is now looking to radically expand its power over it in order to "fix it" - which it won't be able to do. As part of the supposed "fix", it has stepped in to alter mortgage contracts and credit card contracts. This will only increase the cost of loans for everyone and help push interest rates higher as banks are forced to take on more risk (yet again) than they want to (or can handle).

In the insurance industry, the deadly combination of the ousting of the man who built AIG, "Hank" Greenberg, by a power-hungry Elliot Spitzer without any proof of wrongdoing in an alleged accounting scandal, the installation of incompetent management, the application of an irrational "fair value" accounting method (AKA "mark to market") combined with irrational legal reserve requirements has already helped to take down AIG and ruin its reputation.

If the optional Federal Charter for insurance companies becomes a mandatory Federal Charter, it would mean that all insurance companies would be regulated by the Federal Government. This is being discussed as a way to "simplify" the industry and establish uniform regulation in the industry. It's a short step from there to take over the insurance industry in the same manner that it's doing to the banking industry. First, it needs to "break" the industry. Then it needs to take it over to "fix" it.

In some ways it's already happening. The Securities and Exchange Commission is fighting to regulate fixed annuity contracts. Essentially, this means another layer of fees for consumers and more social engineering to influence the purchase of certain financial products.

If life insurance companies become victims of Government greed in the same way that banks have, you could very well see your life and annuity cash values raided by tax-hungry politicians (remember the "accumulation penalty" in the 1990s which was a 15% excise tax for accumulating "too much money" in qualified retirement accounts?) to pay for spending deficits. Contracts could potentially be altered for "your protection" when life insurers can't meet their obligations due to Government greed, and insurance companies fail en mass only to be "rescued" by Government. All the while, the free market will take the blame.

Of course, there is always a bit of speculation when forecasting the future as to how the specifics will play out. What comes next is anybody's guess.

This entry was posted on April 29th, 2009 by David C Lewis, RFC. Edits may have been made to keep this entry current. · No Comments · Asset Preservation, Current Events, Insurance & Savings

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