The best magazine
- A life insurance company takes your premium dollars and invests them into bonds and bond-like investments. These bond-like investments generate income to the insurer. The insurer then credits most of this interest to the whole life policy. It has to since the cash value is guaranteed to be equal to the death benefit when you reach your age 100.
- The rate of return on the whole life policy must be conservative enough to maintain stability. Yet, the return must be aggressive enough to fulfill the promises of the insurer. The insurance company may invest in some stocks, but an overly aggressive strategy subjects the policy to significant risks. The risk that the company cannot build the cash value promised means that the insurer has defaulted on the contract. This is very serious and could lead to insolvency on the part of the insurance company.
- States regulate the insurance business, but insurance companies keep cash reserves as a matter of doing business. Insurance companies also buy insurance from each other to cover a risk of default. In a sense, insurance companies protect you and other insurance companies. Those companies are, in turn, protected by their peers. In this way, risks can be spread out among everyone living on earth (if the "net" of insured companies is wide enough), thus reducing the risk that the insurer won't meet its financial obligations.
- You should carefully consider an insurance company's financial strength, even though insurers tend to reinsure each other. A company with strong reserve amounts and good financial ratings will reduce your reliance on your insurance company needing protection from other insurers. When buying a life insurance policy, choose the policy that meets your financial needs the best. Some insurance policies pay a high interest rate compared to fixed-rate investments. Others pay a low rate, but offer other advantages, like higher death benefit amounts per premium dollar spent.
Function
Significance
Benefit
Consideration
Source: ...