If the U.S. dollar were to lose its status as the world's reserve currency, it could have profound effects on the U.S. economy and potentially on life insurance policies. However, the precise impacts are uncertain and would depend on numerous factors, including how quickly the change occurred, what currency or currencies took over as the reserve currency, and how the U.S. and global economies adapted to the change.
Here are some possible impacts on a whole life insurance policy with a mutual insurance company:
Cash Value & Death Benefit: Both the cash value and death benefit in a whole life insurance policy are contractually guaranteed by the insurance company. They are denominated in U.S. dollars and would not directly change if the dollar lost its reserve currency status. However, such an event could lead to inflation or economic instability, which could affect the purchasing power of these benefits.
Premiums: Premium payments are also denominated in U.S. dollars and would not directly change. However, if you are paying premiums from an income or savings that are significantly impacted by the dollar's depreciation (for instance, if your income loses purchasing power), it might become more challenging to afford these premium payments.
Dividends: Dividends are not guaranteed and depend on the financial performance of the insurance company. If the loss of reserve currency status led to economic instability or negatively impacted the company's investments, it could reduce the dividends you receive.
Policy Loans: If you have or are considering a policy loan, changes in interest rates due to economic shifts could impact the terms of the loan.
Insurance Company Stability: Insurance companies invest the premiums they receive in a diversified portfolio of assets, often including bonds, real estate, and other securities. The value of these investments could be impacted if the U.S. dollar loses its reserve currency status, which could, in turn, affect the insurance company's financial stability. However, insurance companies are heavily regulated and required to maintain substantial reserves to meet their obligations to policyholders.
It's worth mentioning that the loss of U.S. dollar reserve currency status would be a major global economic event with far-reaching and complex consequences.
The effects on any individual's finances, including the impacts on whole life insurance policies, would vary widely depending on the specific circ*mstances.
The American Civil War
If we look back at U.S. history to a potentially similar situation and how mutual life insurance performed, we have to go back to the American Civil War.
The American Civil War, which took place from 1861 to 1865, had profound effects on every sector of the economy, including the insurance industry. At this time, the life insurance industry was still relatively young in the United States. Some of the earliest U.S. life insurance companies were established in the first half of the 19th century.
There are a few factors to consider when thinking about how mutual life insurance companies fared during the Civil War:
Rise in Mortality Rates: The Civil War led to an increase in death rates, including among civilians. Increased mortality rates could potentially affect the profitability of a life insurance company, which relies on actuarial calculations to price policies and maintain solvency. These companies may have seen an increase in policy payouts due to the war.
Economic Uncertainty: The war also created a lot of economic uncertainty. Such periods of uncertainty can sometimes lead to increased demand for life insurance, as people seek to secure the financial future of their families. However, economic instability might also have made it more difficult for individuals to afford premiums, possibly leading to a decrease in policies sold or an increase in lapsed policies.
Investment Returns: Insurance companies invest the premiums they collect to generate returns and help cover future policy payouts. The war likely created volatility in financial markets, which could have affected the investment returns of these companies.
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Given the dramatic changes in mortality rates, economic conditions, and investment returns during this time, it's likely that some insurance companies struggled while others were able to adapt and remain profitable.
What is incredible to note is that the top mutual life insurance carriers where able to pay out dividends to their whole life policy holders before, during and after the American Civil War.
The Penn Mutual Life Insurance Company, founded in 1847 have paid dividends, every single year consecutively since 1847 to their whole life policy holders. During the American Civil War, they manage to adapt and were profitable.
It is my view that in a scenario where the U.S. Dollar would lose the status as the world's reserve currency, that mutual life insurance companies would adapt and make the pivots necessary to maintain profitability.
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