Do your clients have life insurance or annuity policies? If so, they - and you - may be in trouble.

The plummeting financial markets are dragging down the life insurance industry, which is an important component of the U.S. economy. Continuously escalating losses weaken the companies' capital and eat away at investor confidence.

More than a dozen life insurers have been awaiting action on applications for aid from the government's $700 billion Troubled Asset Relief Program - and thus far, the government hasn't stated whether or not insurers qualify for the program.

Life insurers have undoubtedly been taking a beating. At the time of this article, the Dow Jones Wilshire U.S. Life Insurance Index had fallen 82 percent since its May 2007 all-time high.

Among several of the hardest-hit companies are century-old names that insure the lives of millions of Americans. Shares of Hartford Financial Services Group had been down at one time some 93 percent from their 2008 high. Both MetLife and Prudential Financial are suffering as the value of their vast investment portfolios declines.

As the economy weakens, analysts say that many insurers face losses that can eat away at the capital cushions that regulators require them to maintain.

In addition, experts say that the industry is going through its most chaotic period in recent history, and that it's a pretty scary situation right now.

Ratings agencies and stock investors are beginning to grow concerned about how long the industry can avoid reckoning with the distressed assets on its books. Rating agencies Moody's Investors Service, Standard & Poor's and A.M. Best have cut the ratings of more than a dozen insurers in recent weeks.

The consequences of a weakened life-insurance industry for the economy are significant, because life insurers are among the biggest holders of the nation's corporate debt. For example, if life insurers stop buying bonds, the markets may not fully recover. Their buying activity has already declined.

Any sign of susceptibility among life insurers could further erode confidence and make nervous consumers hesitant to buy insurance products.

Wall Street analysts say that another problem for some life insurers is obligations for variable annuities, a retirement-income product that often guarantees minimum withdrawals or investment returns. As markets plunge to new lows, life insurers need to set aside additional funds to show regulators that they can meet their obligations, further crimping sparse capital.

One stumbling block to receiving TARP funds is that the industry is overseen by state regulators, not by a single federal agency. That means there's no group of federal officials responsible for it or with a deep understanding of its challenges.

Insurers' woes have come largely from investment-grade corporate bonds, commercial real estate and mortgages, regulatory filings show. Many insurers ended 2008 with high levels of losses that, due to accounting rules, they haven't had to record on their bottom lines.

Hartford Financial had $14.6 billion in unrealized losses at year's end. Prudential, the second-largest insurer by assets, had nearly $11.3 billion in unrealized losses, up $5.4 billion in the fourth quarter from the previous quarter.

For additional advice and articles on this specific subject, you may want to have a look at www.irs.gov, www.taxlibrary.us and www.financeexperts.org.

Your clients - and you! - had better review policies and keep track of what's going on.

Lance Wallach speaks and writes extensively about retirement plans, Circular 230 problems and tax-reduction strategies. Reach him through www.vebaplan.com or at (516) 938-5007.

(c) 2009 Accounting Today and SourceMedia, Inc. All Rights Reserved.

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