What does the AIG meltdown mean for life insurance policyholders?
News of the global insurer AIG's financial meltdown was hard to ignore. Once the Federal Reserve provided an $85 billion loan package,
AIG avoided bankruptcy in the short term. In exchange, AIG must pay a high interest rate on the loan (over 11%), agree to oust its CEO and give warrants that equal 80% ownership to the US federal government. The capital and liquidity crunch faced by AIG resulted in from it's exposure to bad mortgage debt by the parent AIG holding company.
Repercussions for Policyholders
You may own a life insurance policy from AIG or one of its subsidiaries (American General or US Life of NY). These companies?capital and reserves are heavily regulated by state law. Each entity is responsible for its own liabilities. Therefore, policyholders are less exposed to the financial turmoil of the parent AIG holding company.
What are the experts saying?
To relieve policyholder anxiety, American General released the statement: American General Life is well capitalized to meet or exceed local regulatory capital requirements and fully committed to meeting the needs of their policyholders across the U.S.?
The National Association of Insurance Commissioners (NAIC) released the following statement:?We have a very strong message for consumers: If you have a policy with an AIG insurance company, they are solvent and have the capability to pay claims".
The New York State Insurance Commission made a similar reassuring statement on CNBC. Panicking policyholders who dump their life policies will only add to the erosion of financial assets and revenue by AIG, exacerbating the problem.
Worse Case Scenario
But with front page headlines and a deepening financial crisis, consumers are still uncertain and anxious about their policies. What is the worst case scenario? If AIG or any insurance company goes insolvent, every state has life insurance guaranty funds. The state will, in effect, take over the company and assume responsibility for liabilities, usually up to $300,000 of death benefit, depending on the state. Policyholders are first in line for any assets the insurance company owns. An effort is made to have the book of policies absorbed by one or a group of insurance companies.
What should I do?
Consumers buy life insurance for peace of mind and news of possible financial insolvency do not provide much peace. But before making a rash decision, consider all your options and do not panic. Some consumers want to drop their coverage and replace it with another policy from a more stable insurance company. However, this may not be in your best interest, especially if your health has changed since you applied for your policy, you're older so the policy may cost more and there is no guarantee that the company you are switching to will not have financial issues of their own in the future.
In most cases, it makes sense to ride out this storm. If you are convinced you want to make a change or just need reassurance, speak to an insurance professional that represents many insurance companies and can help you put together an overall insurance plan. By reviewing your policy, you may decide you need more insurance or less. The silver lining for many consumers is they are now paying attention to their own insurance portfolio to make certain it is meeting their needs.