The Risks of Life Insurance

(Michael Manning - AP)
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By David S. Hilzenrath and Nancy Trejos
Washington Post Staff Writers
Sunday, February 1, 2009

It was a head-spinning week for anyone with a life insurance policy.

First, the industry lobby argued that some insurers are in such dire shape that they need immediate relief from requirements meant to keep them solvent. Then, when regulators denied the relief, the industry lobby was quick to issue a more soothing message: Don't worry, there is plenty of money to pay claims.

The mixed messages may have left you hoping you never need life insurance. But if you already have a policy or need to buy one to protect your spouse and children, how nervous should you be?

The hard truth is . . . it's hard to know.

But we do know this: there's a safety net that could protect you if your insurer fails. However, there are limits to the benefits it covers, and the safety net has distinct vulnerabilities of its own.

If this doesn't comfort you, beware that dumping your policy could have serious consequences. For example, depending on your age and health, you might have trouble replacing it, or you could end up paying much more for a new policy.

Going without insurance carries a separate set of risks.

When you buy life insurance, or an annuity guaranteed by an insurance company, you're counting on the insurer to keep its commitment years or decades from now. The insurance industry's wherewithal is closely tied to the health of the broader financial system. If the investments that insurance companies make with your premium dollars don't perform well enough over the long run -- or even the not-so-long run -- insurers could have trouble keeping their promises.

(Then again, if the financial markets don't recover, we'll all have much bigger problems to worry about, said one economist who works with insurance companies.)

The president of the American Council of Life Insurers, former Oklahoma governor Frank Keating, last week conveyed a sense of the uncertainty in a statement after state regulators handed his group a resounding defeat.

"To date, the industry's capital and reserve levels have weathered the financial turmoil currently gripping our nation and life insurers remain well-positioned to meet their obligations to policyholders," Keating said. "However, no one knows when this current market turmoil will end or what effect it ultimately will have on our economy."

So how is the health of the insurance industry?

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