When the stock market plummets, wise investors take action to ensure their assets are diversified and their losses minimized. Life insurance policies should be treated with the same careful attention.
That is especially true now, because the insurance industry and policyholders are in the midst of a “perfect storm,” with historically low interest rates, rising life spans and rising insurance costs merging to impact the value of permanent life insurance policies.
As an advisor, here is one important thing you need to know: Five insurance companies raised rates in 2015, some by 100% or more.
We’ve been recommending policies to clients for years and this is the first time we’ve seen this type of shift. It’s not due to corporate greed. Several factors have contributed to these powerful winds of change, and it’s led to significant rate increases for many consumers.
Here are the main trends influencing the changes:
1.Interest rates have been declining and have been at historic lows for over a decade.
Unfortunately, economic factors are working against insurance carriers when it comes to providing consistent income. Insurance carriers don’t earn their revenues primarily from premiums. As much as 50% of their revenue comes from interest-bearing securities, primarily bonds and mortgages. So low interest rates have a direct impact on insurance company profitability.
2.Squeezed policy crediting rates. Insurance companies price life insurance products with interest margins of 25 to 100 or more basis points, and these have been squeezed and in some cases gone negative. As crediting rates on these older policies cannot be lowered further, this leads to the next issue—rising insurance costs.
3.Rising cost of insurance. Insurance charges are applied not only to recover death claims, but also to recoup commissions, cover costs related to issuing and administering each policy and to make a profit. To cover their losses in interest margins, the carriers are being forced to raise costs for certain policies. That’s why five carriers raised their rates in 2015 and why more may follow.
4.People are living longer. Longer life spans used to be a good thing for insurance companies and policyholders. But older policies with higher guaranteed crediting rates are, as we already noted, potentially unprofitable in a low-interest-rate environment.
If people live into their 90s, they may also end up having to pay more for their permanent life insurance to maintain coverage.
Insurance companies have always had the right to raise rates on policyholders—at least up to the guaranteed maximum for the policy. But in our experience over the past 28 years, that has rarely happened. In fact, the trend was for premium rates to remain unchanged for in-force policies and to go down on new policies. But the situation has reversed itself, and it’s having a major impact on policyholders.
Here’s just one example:
One of our clients, Mary, a 79-year-old policyholder, called in a panic. She’d just received a notification that the premiums on her permanent life policy would have to be nearly doubled. Mary happens to be a senior citizen on a fixed income.
“How can they raise my rates when we agreed on what I was buying?” she asked. “I thought I would be paying the same fee for the life of the policy. Now I don’t know what to do.”
Our mission is to stay abreast of changes in the industry and focus on proactive planning for our clients. Yet we were surprised, too. Which made us wonder: If even we were shaken by a 100% increase in Mary’s premium, what was happening to policyholders who don’t have trusted advisors to address the problem?
It’s important not to view insurance carriers as the “bad guys” in this scenario. Far from acting as profiteers, they are doing all they can to keep rates as low as possible in an effort to protect their own reputations. But they need enough income to fund each policy and maintain enough financial strength to pay out death claims.
In the current environment, raising the cost of insurance is their only option. However, this does not mean that policyholders must just accept the situation and pay up. As with any storm, being proactive can soften the blow.
For advisors, such precautions should include an independent policy review.
On the surface, life insurance is pretty basic. You pay a premium for a certain level of coverage and, assuming you continue to pay as scheduled, your beneficiaries receive a benefit when you die. If only it were that simple! When you dig down into the details, life insurance is a highly complex estate-planning tool that requires careful product and carrier selection, in-depth analysis and—perhaps most importantly—periodic review, especially in times of economic and market turbulence.