Over the long run, insurance companies cannot credit more interest to policy cash values than they earn on their general investment portfolios. To assess a company’s long run interest crediting ability, one should evaluate the insurer’s current portfolio and its investment philosophy.
As a general rule, insurance companies invest their portfolios predominantly in long-term corporate and government bonds and mortgages. However, the proportions invested in each type of asset as well as the quality, duration, yields, and risk of the particular assets differs by company. In the past, some companies were pushed to insolvency because of overly aggressive investments in high yield and high risk junk bonds and developmental mortgage loans. Therefore, potential insureds’ should try to select companies with investment portfolios and investment philosophies that show a reasonable and acceptable combination of risk and return. What is reasonable and acceptable, of course, depends on the level of risk and the certainty of return desired by the policyowner.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM