"May you live in interesting times" is a phrase we often hear that is claimed to be an interpretation of a traditional Chinese curse. I can say this honestly gave me a giggle in light of the times in which we live. However, it is not just a Pandemic that makes these times interesting.
There has been trouble brewing with life insurance carriers for decades now. There are very little headlines about it today, but there will be if interest rates don’t start rising. What am I talking about?
If you buy a life insurance policy, you are buying a contract. You promise to pay a premium, and the company promises to pay a death benefit. But…there is a saying…the big print giveth and little print taketh away!
Is your premium enough to guarantee the death benefit? Is it a guarantee at all?
It’s important to note that there has never been a policy that has failed to pay its contractual dues. After all, if one did, no one would ever trust an insurance company again. Even if a company fails, the industry (other companies) doesn’t want this bad rap. Historically, they buy the contracts and fulfill them.
The problem today is that a lot of companies are in trouble. Check out this historical view of the 30-year treasury rate.1
For over 30 years now, this trendline is negative. Interest is near to nothing and there is no end in sight that they will start rising. After all, our country could not afford its own debt payments if the Fed did raise rates.
What does this have to do with life insurance? A lot!
Life insurance companies are required to keep reserves in order to guarantee your death benefit. The amount of reserves is based on a multiple of the risk of the asset held in reserve. In other words, and in short-form, you pay a premium. A piece of that premium buys a long-term bond that is held for reserve. The riskier the bond, the more premium that has to be put back.
So, back to the trend line. Because interest rates have kept going down, bond yields are lower. Therefore, life insurance carriers are making far less on their reserves than they were five years ago, ten years ago, etc. Oh…and by the way…unexpectedly. The industry as a whole has continued to be optimistic that at some point interest rates would go back up. Unfortunately, they have been dead wrong.
The result is that this truly is the worst time in history to be a life insurance company. It is hurting. This leaves very few options. Carriers are scrambling. Some carriers are increasing risk, which is forcing a higher reserve requirement. Many carriers are increasing the internal costs in the policies as much as they can contractually and are lowering benefits as much as they can for the insured. Then, there are companies that are raising capital and kicking the can, and others that are getting out of the life insurance business altogether.
In 1987, there were 2,337 life insurance companies. By the end of 2019, there were 761.2 And it hasn’t stopped there.…Voya, Allstate, American Financial, Jackson National, Ohio National, Principal, and AIG all sold a part or all of their life business earlier this year.
What does this mean for you? The short answer is, you can’t set it and forget it. What you think you have; you may not have. Over the last few years, we have run into several scenarios when a policy would run out of money before the life expectancy, and the family had no idea. Your life insurance needs an x-ray and holistic review NOW! First, you need to know what you really have. Then, you need to learn what you really need. And last, how and where do you get it in this crazy environment we’re in today.
But WAIT! You may also be thinking…well my family won’t need it anyway.
Interestingly, it is a seller’s market. Don’t throw away all the money you have sunk into your policy without first learning if you can join that list of sellers. Even a non-permanent policy or a company owned policy might give you an opportunity to put a chunk of cash in your hands…and at times…a significant one.
The bottom line is short and sweet: Life insurance ain’t what it used to be, but it doesn’t mean it’s useless or not needed. It just needs to be managed. The good news: we are here to help! We have dedicated resources and time and we remain experts in this field for more than forty years. You have no excuses. Don’t let your family have a nasty surprise when they needed what you planned for the most.
- Source: https://www.macrotrends.net/2521/30-year-treasury-bond-rate-yield-chart
- ACLI Life Insurer