General Loan Considerations for Life Insurance Companies

Three broad considerations which apply to any investor are (1) Security of Principal; (2) Yield: and. (3) Liquidity. Of these: the most important to a fiduciary institution such as a life insurance company is security of principal. Life insurance companies, like banks, do not invest their own funds, but funds of others. Policyowner reserves and other reserves for liabilities are analogous to a depositor's funds held by a bank, and equal about 91 percent of the average life insurance company's assets.

Life companies operate under state charters and are subject to regulation by the insurance commissions of the various states in which they operate. Investment policies in particular are subject to control. These state investment policies vary, but their purpose is to regulate the life company investments primarily into safe "fixed-dollar" investments in order to protect the asset value and policyowner reserve.

Within the framework of legal investments the life insurance company investment staff, of course, attempts to obtain the best yield possible for, like all business enterprises, life companies must make money to stay in business. Their constantly changing portfolios are a reflection of constantly changing investment opportunities. Life companies are not as concerned with investment liquidity as commercial banks and other investors holding demand deposits, or other short-term obligations. Liabilities of a life insurance company are essentially long-term obligations, thus encouraging investment in long-term issues which offer more attractive rates of return. Considering all aspects of investments, a life insurance company will seek to keep its assets primarily in long-life securities. Revenue from premium payments, income from interest and maturing securities usually offer ample liquidity for day-to-day life insurance company operations.

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