If you have always wanted to know what life insurance companies do with your premium payments, keep reading.
Life insurers have to make sure that they have enough cash to pay out claims, settlements, payroll, commissions, overhead expenditures, compliance fees, and other processes/fees required to stay functional. State regulations often subject life insurance companies to certain liquidity levels and operational balances, and thus this is where premium payments are first applied. Additionally, some insurers will set aside some cash to provide loans to their clients, since this tends to be an easy form of profit.
Most life insurance companies depend on investment banking operations to manage their bottom lines. Once all the operational expenses have been paid, the next step is to turn the money over to fund managers so that they can make it grow through investments.
Fund managers can be internal, external or hybrid; these financial professionals know that they can only invest in certain asset classes in compliance with federal and state regulations. When insurance companies prefer to manage financial matters on an in-house basis, they are called institutional investors, and their movements on the market are closely watched by Wall Street firms.
Insurance companies happen to be major investors in bonds of all kinds. It is estimated that a little more than 50 percent of bonds held by insurance companies are of the corporate variety; these are considered to be conservative investments with attractive market values and handsome interest payments. It is not unusual for an insurance company to invest in the bonds of a competitor.
Some life insurance policies are investment vehicles themselves. If you are paying monthly premiums to an insurance company that sends you updated statements about the value of the policy and how much you could borrow from it, you are likely participating in an investment system along with your life coverage. Selling one’s life insurance policy as way to maximize one’s benefit from it is not an uncommon practice when the policy has an investment feature.
Your life insurance premiums might not be going directly toward your policy’s cash value, but they are still essential to its maintenance. The money just gets around a little more, that’s all.
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