Life Insurance Supplements Social Security By $1T Over 7 Years

NEW YORK – Life insurance is Social Security’s mirror image in the private sector, an auxiliary safety net that has paid out more than $1 trillion in benefits over the past seven years. That’s equal to 20 percent of spending by the federal government’s largest program, according to a study released today.

If the federal government expanded social insurance to cover the benefits provided by the private life insurance industry, it could cost up to $160 billion a year. On an individual level, payroll taxes would have to increase by 20 percent to replicate the survivor, disability and retirement benefits provided by life insurers.

“The insurance industry supplements the social safety net in the United States by providing vital financial protection to tens of millions of families,” said MetLife Executive Vice President for Corporate Affairs Michael Zarcone. “The report also shows that the industry fuels economic growth and jobs through the trillions of dollars in patient capital we invest in infrastructure, real estate and other long-term assets,” he said.\

Social Security and Life Insurance Payments(2010-2016)
Social Security Life Insurance
Survivor $782 billion $466 billion
Retirement $3,919 billion $528 billion
Disability $958 billion $123 billion
Total $5.7 trillion $ 1.1 trillion

The MetLife-sponsored study, “The Social and Economic Contributions of the Life Insurance Industry,” was authored by experts at The Brattle Group, a global economic consulting firm that has advised both government agencies and private companies.

The life insurance industry plays an important role in easing the burden on government programs. “The fact that so many life insurance policies are purchased undoubtedly relieves pressure on the social welfare systems in many states,” according to Organization for Economic Cooperation and Development research cited by Brattle. That is why life insurance “is generally viewed with favor by governments.”

For example, the study estimates that of the 18,000 low-income households expected to lose a primary wage earner in a given year, life insurance keeps more than 8,000 of them – or 45 percent – out of poverty, for savings to the government of more than half a billion dollars.

A $7 Trillion Investment in the Economy

Beyond its role as a supplement to government-provided benefits, life insurance is a significant driver of economic growth, with more than $7 trillion of capital invested in the economy. Among the economic benefits of the life insurance industry: greater investment due to a lower cost of funds, more efficient capital allocation, and mitigation of negative financial shocks.

According to research across 56 countries from 1976-2004, every percentage point increase in the ratio of life insurance premiums to gross domestic product (GDP) would lead to a 0.15 percentage point increase in the rate of real GDP growth. For the U.S. economy, such an increase would boost real GDP by approximately $26 billion per year.

The life insurance industry also provides a stable source of funding for the credit markets, with private companies in all sectors of the economy relying on this funding channel. Fully 96 percent of the bonds held by life insurers in 2017 had a maturity greater than five years, and more than two thirds had a maturity greater than 10 years. By contrast, only 27 percent of commercial bank assets have a maturity greater than five years. Because life insurers’ liabilities are long-term in nature, they are an ideal patient funding source for longer-term projects, especially infrastructure, the paper says.

This long-term focus has an added benefit: it makes life insurers an important source of financial stability during periods of broader market turmoil. Commercial banks and broker-dealers that rely on short-term wholesale funding are susceptible to liquidity crises. With life insurers, stable funding from policyholders greatly reduces the need for liquidity during financial panics.

Life insurers are an especially important source of capital for privately held companies, which tend to be smaller enterprises that find the public markets expensive to access. In 2016, life insurers held nearly $900 billion in private placement debt. Without the life insurance industry, “these investments could not be funded at all or as efficiently, thus driving up the average cost of capital and causing reduced investment,” the paper says.

A Shield against Financial Loss

The total amount of financial protection provided by the life industry in 2016 was $20.3 trillion – an amount equal to 109 percent of the U.S. economy. Approximately 60 percent of Americans are covered either individually or through their workplace, with the average policy equal to 2.5 years of employment income.

Life insurance plays an important role in protecting families against financial hardship. The study looked at what happens to surviving spouses after the death of a primary wage earner. Without life insurance, a third saw their standard of living decline by more than 20 percent. With life insurance, less than a quarter experienced a decline that large.

On retirement security, the report highlights research showing that the private annuity market produces large increases in household net worth. Without private annuities, individuals cannot hedge against outliving their retirement savings except by consuming less or shifting to higher risk investments. For a household headed by a 65-year-old in good health, the private annuity market produces gains equal to 16 percent of the household’s total financial and housing wealth.

“[Life insurance] plays a unique role not only in the safety and security it provides to individuals, but in the stability and liquidity it provides to the financial markets and the overall economy,” the paper concludes. “Furthermore, the life insurance industry significantly alleviates the financial burden caused by mortality, longevity, and morbidity risks for individual households and the U.S. government.”