Insurance Quotes & Advice

Florida has some of the highest property insurance rates in the country with the annual threat from hurricane damage.  Consumers and lawmakers alike have been criticizing insurance companies over high rates in the wake of mild hurricane seasons the last few years as well as for what they claim are disreputable industry practices.

Last week, Florida’s Senate passed a property insurance bill that insurance companies were vehemently opposed to.  The proposed bill, which still needs to be passed by the House would freeze rates on the state’s subsidized insurance program.  It would also increase penalties to companies that violate state insurance laws.

“This is about every consumer getting a fair shake at having a fair and square, straight-up relationship with their carrier,” said Sen. Jeff Atwater, R- North Palm Beach, a sponsor of the bill. “It’s really time that consumers deserve to be front and center in the insurance debate rather than it being about what the insurance industry needs.”

The bill would certainly make insurance more accountable and give the state’s insurance office more teeth.  Earlier this year Florida’s insurance commissioner banned Allstate from writing new policies in the state, however the company is still writing policies to this day while it pursues a lengthy appeals process.

Last year the state spent billions of dollars to fund a program that would give insurance companies a discount on costly reinsurance.  It was supposed to help lower rates across the state but insurance companies raised premiums nonetheless.

Seeing as the carrot didn’t seem to work out to well perhaps it is time for the state to use the stick.

Borrowing against a life insurance policy has grown very popular over the last decade but while there are a number of benefits to this strategy, there are also quite a few consequences as well.  Permanent or universal life insurance policies are made of two components, the death benefit or face value of the policy and the cash value or investment component.

The cash value component is considered an asset so you’re able to use it as collateral for a loan.  Insurance companies will usually let you borrow up to 90% of the cash value of your policy.  A bank can also be used for this as well if they are placed as the beneficiary for the loan amount.

The benefit of borrowing from your own policy is that there is no set repayment schedule so it can offer a lot more flexibility than a regular private loan.  The interest rate will also tend to be lower since there is practically no chance of default.

Theoretically it is possible to not have to pay the loan back until death but that is not recommended.  The loan amount will grow over time as interest is compounded and this is where the danger comes in.

In a bearish market like we currently have, it is quite possible for the loan amount to grow at a faster rate than the cash value component.  If the loan amount ever goes over the cash value amount, one of two things will happen.  Either the borrower pays the difference to the lender to keep the loan amount below the cash value component or the policy lapses.

If a policy is allowed to lapses, what happens is a cash surrender where the cash value amount is paid out, which can have significant tax implications.  Also the death benefit component will now be forfeit which is the main reason you buy insurance in the first place.

Let’s say that you have $100,000 in your cash value account and borrow $75,000 of it from your insurance company.  This doesn’t reduce the cash value component of the policy to $25,000 as the loan is not considered a withdrawal, it’s still at $100,000 and will continue to grow at a tax deferred rate..

Then let’s say you chose not to repay the loan and that eventually over time, both the loan amount and cash value have grown to $300,000 when the policy finally lapses.  The cash surrender value then becomes fully taxable as income by the IRS at whatever tax bracket you are in.

It is quite possible, if you are in a high enough tax bracket and if the loan was for a long enough duration, that the taxes owed may be more than the original amount borrowed.  So even though you only borrowed $75,000 initially, you will be responsible for paying taxes on the full $300,000 amount of the cash value component.

It is very important to talk to a credible financial planner and make an informed decision before entering into this type of loan agreement.

The meltdown of credit markets has led to calls for increased regulation of the financial services sector including the insurance industry.  With estimates that losses will approach the $1 trillion mark, which some feel is still too conservative, it provides a powerful weapon for Congress to force change onto the system.

The battles lines are being drawn as states fight the attempt to impose federal oversight of what has been their regulatory domain for over a century.

“The state-based regulatory regime has been very effective for more than 150 years,” Dinallo said. “Insurance oversight has been rigorous, resulting in high regulatory compliance and avoiding the level of insolvencies and market meltdowns we have seen in other sectors of the U.S. financial community. Indeed, our national solvency system has ensured that companies have the wherewithal to pay claims while remaining competitive and profitable.”

While the insurance industry has had some setbacks during this financial crisis, it is faring much better than commercial banks and securities firms, both of which are currently regulated at the federal level.

Much of the blame for the current credit crisis can be laid at the feet of the federal government, which has been deregulating the financial services sector for years.  It was under their watch that the current financial troubles came about.  In fact, the largely unregulated $500 trillion derivatives market still remains a “Sword of Damocles” hanging over the entire financial sector. 

Would the federal government do a better job this time with insurance?  I’m not so sure that shifting regulatory control out state’s hands would be in the best interest to consumers.  While the current system of state regulation may be highly inefficient, I would not call it under regulated by any means.