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Life insurance companies have come under financial strain in recent months because the credit markets have been frozen causing their capital levels to seriously decline and several of them might soon be getting government bailout money.

A number of the companies involved offered to buy small bank holding companies last fall, but added the proviso that the purchases would be dependent on their obtaining bank holding company status, and TARP (Troubled Asset Relief Program) funds.

Life insurance companies that are bank holding companies are already technically eligible to receive TARP money, and if approved by the Treasury several of them will receive a total of $20 billion.

The companies with their hands out are, Prudential Financial, Genworth Financial, Hartford Financial Services and Lincoln National, and a financial industry source close to the TARP process says that following a review which is still in its preliminary stages, “that some assistance for life insurance companies cannot be ruled out”.

Life insurance companies are said to be suffering more during the financial crisis than those that cover health, property and casualty due to their mix of assets which usually includes mortgage-backed securities along with riskier investments that were considered acceptable because their liabilities are longer-dated.

A life policy would more than likely only have to be paid 20 or 30 years down the line, whereas a health insurer might have to start paying out almost immediately.

The Treasury was considering providing TARP funds to life insurance companies under the Bush Administration, but the review was postponed because of the transition to the Obama Administration and the problems in the auto industry.

‘Senate Banking Committee Chairman’, Christopher Dodd stated yesterday that “Some banks will have to be taken over for a short time. I don’t welcome that at all but I could see how it’s possible it may happen. I’m concerned that we may end up having to do that, at least for a short time”, but both his House counterpart, ‘Financial Services Committee Chairman’ Barney Frank and the Republican Senator Jon Kyl strongly disagreed.

The chances that a takeover of U.S. banks is however gaining support in some areas with former ‘Federal Reserve Chairman’ Alan Greenspan telling the ‘Financial Times’ earlier this week that “the U.S. may have to temporarily nationalize some banks until the industry is restructured”, and Republican Senator Lindsey Graham who is a member of the ‘Budget Committee’ is on record as saying that he “wouldn’t reject the idea of nationalizing the banks”.

Jon Kyl’s response was, “I don’t think it’s something the market has to worry about. There are plenty of tools that we have short of that to deal with the crisis and nationalizing U.S. banks is out of the question and isn’t going to happen”.

Barney Frank who is the Massachusetts democrat that heads the House panel said he that didn’t “see the likelihood U.S. banks would be nationalized” and added that “Geithner’s bank bailout plan should be given time to take effect. If that works, then we don’t have to go beyond it”.

Christopher Dodd did concede however that, “As long as they think their money is being squandered on bonuses or super salaries at a point like this, the job of getting people to support what we need to do is going to be that much more difficult”.

Shares in Citigroup Inc. and Bank of America Corp. fell by around 36% yesterday to which the Obama administration responded, “a privately held banking system is the correct way to go. That’s been our belief for quite some time and we continue to have that”.

The response was perhaps not surprising since the two companies were the recipients of $90 billion in U.S. aid in just four months.