Imagine having bought a permanent life insurance policy only to find out that it is not so permanent. In fact, you learn that you will most likely outlive the policy you have been paying - and counting on - for years.
Sadly, this is becoming more and more common. Yet this doesn’t mean that life insurance isn’t something you need or shouldn’t have. In fact, it is still a great thing for a great many people. It simply means you need to treat it like an investment. It needs to be fully understood and monitored.
To begin, let’s start by understanding why this is happening and there is one simple answer: low interest rates. How?
As soon as a life insurance company insures you, they must make sure there are dollars available to pay your claim if you died. These amounts are actually mandated and called “reserve requirements.” These reserve requirements must be kept in stable investments like cash or bonds. In theory, the more a life insurance company can earn with these investments would mean the lower the cost of insurance to the policy holder. Now, I want you to look at something. These are the 30-Year Treasury Bond Rates.
Let’s imagine you bought a policy in 2007. Your policy was probably priced on interest rates being around 5%. After all, this is about what the 30-Year Treasury rate was at this time. Though looking at the graph again, what have interest rates done since then? They certainly haven’t gone up. At the end of June, rates were a whopping 1.39%.
How can a company support a price design based on 5% when they cannot buy a bond that will pay this? They have one of two choices… or a combination thereof. They can buy riskier assets and reach for yield and/or they can raise the Cost of Insurance (COI) within the policy.
Now that you have the basics, take another look at this chart. Rates have been falling since the 1980’s. I remember in 2008 when rates went below 3% for a brief period of time. Everyone in the insurance industry said that they had nowhere to go but up. Well here we are. Twelve years later and they are still falling.
Many insurance companies have been hanging on with their bare teeth in hopes this situation would turn around, but this continued downward pressure is just too much. Across the board, companies are raising Cost of Insurance. They have to do it.
What does this mean for you? Whether you bought a policy last year or thirty years ago, it needs an x-ray. You often cannot see these effects on your statement. You need to see the inside of the policy. How is it doing right now? What will it look like if the COI increases?
Sadly, we have seen policies on the verge of lapsing, policies with premiums that need to increase drastically or they will have the same fate in the near future, and policies that are not worth saving. On the flip side, we have seen policies that have been monitored and managed that are in great shape.
You won’t know until you ask. Don’t let your life insurance, and by the way, your family be another victim of this pandemic. Let us help you get that x-ray on your life insurance today!