CHAPTER 7

Threats to the Safety Nets

THE FUTURE OF WHOLE LIFE INSURANCE AND ANNUITIES

Why do people buy whole life insurance and annuities? Our faith in these products is so solid that the question seems almost silly. We buy them for protection, of course! If bonds are considered safer than stocks, then insurance and annuities are supposed to be even safer than bonds. The universal assumption is that, even in the rare event that the company goes under, these policies always pay out. These are the bedrock safety instruments that allow even the most anxious investors to sleep soundly at night. Like the old Prudential ad that calmly reassures us: you can always count on “The Rock.”

Where did this “rock solid” mentality come from? Like most of our ideas about money and investing, it came from the past. Today, people don’t worry too much about the safety of their money in banks, but before the Federal Deposit Insurance Corporation (FDIC) was established so that the government insured depositors’ money, banks were not always so safe. If you lived in New York or Chicago, you might have access to some very reputable financial institutions. But if you lived in more remote parts of the country, the pickings were slim. If you had a nest egg to protect, keeping it under your mattress or burying gold in your backyard may have seemed like a better option than risking it at the bank.

Enter whole life insurance and annuities. These could be bought from a national company with a solid reputation. ...

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