Wednesday, April 08, 2009

Bailout of the day - Life Insurers

"The U.S. Treasury Department plans to extend the Troubled Asset Relief Program to certain life insurers, The Wall Street Journal reported on Tuesday, citing people familiar with the matter.

The Treasury is expected to announce within the next several days the inclusion of life insurers that are bank holding companies or own a thrift, the Journal reported on its website.

Several life insurers have applied, including Prudential Financial Inc, Hartford Financial Services Group Inc and Lincoln National Corp, the Journal reported."

A lot of people are wondering why the insurers would need a bailout, but you should know that insurance companies are investment firms in sheeps clothing. They take your premium, invest it, payout a death benefit (or other benefit) and keep the difference for themselves and their shareholders. When they don't make good investments they can't afford to payout the death benefits and need a bailout.

I see the argument that life insurance policyholders are similar to bank depositors and if we're bailing out the banks, we can't stop at the insurance companies. However, a substantial piece of business at companies like Hartford, Prudential and Lincoln National is investment management. I'm concerned that we're bailout out investors that bought "annuities" and other investment contracts. If the insurers aim to use any bailout funds to make their investors whole, I would be strongly opposed to using taxpayer dollars for that purpose. You took a risk that Prudential or Hartford was better at managing your money than you would be. If they failed at managing that money, sorry, but that's between you and Hartford leave Johnny taxpayer out of it.

This is a critical distinction that I hope is clarified in the next few days.

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