By now you’ve probably heard the news about all the bank failures in the last few days and the pending failures to come. Let me take a minute to simply explain how one of Forbes Magazine’s “Best banks in America” (Silicon Valley Bank) collapsed in a single day:
Step 1: bank takes in a lot of money from depositors
Step 2: bank loans out 90%+ of those deposits to borrowers so the bank can make money
Step 3: when the bank can’t generate enough loans to put all the money on deposit to work, it finds another investment to put the deposits into (low yield, long term Treasury bonds, in this case)
Step 4: the Fed raises interest rates and now the bank’s investments look really bad
Step 5: depositors start wanting more of their cash back than the bank expected
Step 6: the bank has to sell its investment holdings at a loss (aka fire sale) in order to have the cash to give back to depositors
Step 7: depositors catch wind of the banks losses and realize they need to move their money into a more stable bank while they still have the chance
Step 8: Good old fashioned Bank Run!
Step 9: bank becomes insolvent (bankrupt) because it doesn’t have enough cash to fill depositor’s requests
Step 10: the State takes over the bank
That, ladies and gentlemen, is the natural result of Fractional Reserve Banking, the principle upon which our entire banking system is built. Banks are only required to keep a “fraction” of the deposits in the bank—-and can loan out the rest.
Here’s the good news: there is a SAFER place to store your capital!
Where? Inside a Mutual Life Insurance Company!
Why are Mutual Life Insurance Companies safer than banks? Here’s just a few reasons:
- They are not allowed to practice fractional reserve banking. In other words, they cannot create money “out of thin air” like commercial banks and take big risks with your money
- They must keep enough liquid reserves to cover all of their present liabilities
- They are highly regulated at the State level and closely monitored by regulators
- Every State has a guarantee in place to cover policy holders in the case a company becomes insolvent
- Companies that make riskier investment choices are required to keep MORE assets on reserve over and above what their liabilities are. This discourages the companies from making risky bets
- FAR fewer life insurance companies have failed than banks in the last 100 years. And those that did were typically acquired by larger companies that took on their liabilities
- Even during the Great Depression when over 9,000 banks failed, never did a life insurance company fail to pay out a death claim
- Most of their investments are in long-term investment-grade bonds so they can accurately forecast how much cash they will have any given year to pay out their expected death claims (which are extremely accurate because they are based on actuarial science)
- I’ve never heard of a “bank run” on a Mutual Life Insurance Company!
There is a reason that there are several 100+ year old Mutual Life Insurance Companies still standing today that have paid out dividends every single year for over 100 years. And there is a reason so many banks and corporations own billions of dollars of whole life insurance on their key employees: because it’s a safe place to put money!
So here’s my quick advice on how to protect your capital:
- If you have any room in your policies for more premium or for a loan repayment, put your cash there immediately. There is no reason to have your money sitting in someone else’s bank if you don’t need it in the next month
- If you don’t have room in your policies for more cash and you MUST keep cash in a bank and you have more than $250,000 on deposit with the bank:
- Spread it between accounts where you are the sole account holder and accounts where you are a joint account holder
- Spread it between different banks and credit unions
- Keep those account balances below $250,000 (the FDIC protection limit)
I hope that summary helps. As always, feel free to schedule some time with me anytime you’d like to talk more.
ALSO – Join me and my podcast partner Paul Fugere on Tuesday March 21st at 7pm Central Time for another Live IBC Q&A!