The Cost Of (Life) Insurance

After 20+ years of life insurance rates going down, the chaos of the last 12 months appears to have put an end to the trend. The cost of insurance is primarily comprised of two variables, mortality experience and interest rates. Both of those variables have not fared well this year with over 400,000 unexpected deaths and an economy that is in the tank.

How Is Mortality Experience Viewed?

Simply put, actuaries (the guys who figure out what to charge for life insurance) have data going back decades that, coupled with knowledge of medical breakthroughs, gives them the ability to know how many people will die each year. It actually dives deeper than that. They have a very accurate idea how many people will die, how many will be from specific age groups, and what the causes of death will be. It’s this knowledge that helps them accurately predict the risk that life insurance companies will be accepting when they approve policies at different rates.

To some degree those assumptions take into account catastrophic events like 9/11, Hurricane Katrina, etc. While life insurance companies will not hesitate to pay Covid 19 related claims, when the death toll neared 300,000 and then 400,000, the subject of mortality experience and pricing came to the forefront. While the Spanish Flu pandemic had to be have been in the back of actuarial minds for a long time, the downward trend in pricing for the last 25 years leads me to believe that there was an assumption that it wouldn’t happen again.But that isn’t the whole story. Remember that the cost of insurance has two variables and both variables combined lead to actuarial assumptions.

How Does The Economy Impact Life Insurance Rates?

The quick and easy answer is that life insurance products that are tied to economic indicators take a beating and in crazy high unemployment like we are seeing people are having to make tough choices about budget, and life insurance is often view as discretionary spending and it is cancelled. This means that products like variable universal life and indexed universal life are going to go through some rough times and policy owners will see their hoped for return on investment do even worse than they had thought possible. That could mean that it will take an increase in premium to keep the long term NOT GUARANTEED values viable. The life insurance companies will feel that hit as well, and a large number of companies that offer universal life products have already raised rates on new policies that are sold. Those increases will also roll over to in force policies for any values (cash value, premiums, etc) that aren’t in the guaranteed column.

The other side of the equation that I alluded to above it that there will be a larger than normal lapse rate on in force life insurance because people have decided, for better or worse, that it isn’t something they can afford. This will have a two fold impact on life insurance companies. 1. Their income will be reduced and 2. The mortality risk will increase because, historically, people who have serious health issues are less likely to let go of their life insurance.

Bottom Line

What we have seen so far is a large number of companies raising rates on universal life products. As I was writing this Principal National announced that they were joining other large companies increasing rates on their universal life products.The increases are not for the faint of heart being in the 15-20% range. My advice is that if you are looking for permanent life insurance, don’t wait. There are still companies who haven’t slammed the panic button and, while disappearing quickly, there are still values that are in tune with the “price reductions” of the last 20 years. If you are considering term life or whole life, companies seem to be holding off on increases for now. But buyer beware, it doesn’t appear that will last. The best plan to avoid paying higher rates is to review your life insurance needs now, and make a decision about how a 20% increase would impact you.

If you have questions or would like to discuss this new reality, call or email me directly. My name is Ed Hinerman. Let’s talk….soon.