Scott Witt, president of Witt Actuarial Services, a fee-only consultant that analyzes life insurance policies and annuities for financial planners and affluent individuals, New Berlin, Wisconsin. WittActuarialServices.com
The pandemic is taking a toll on the life insurance market in ways that are pushing up premiums on policies and making it harder to get or keep certain types of coverage. The primary reason is that interest rates plunged as the pandemic sparked a recession.
Life insurance companies price policies based on the assumption that they will invest primarily in bonds with the premiums they receive. Persistently low interest rates undercut those bond returns, prompting insurers to charge higher premiums and/or fees. Some issuers, including the biggest life insurer, Prudential Financial, have temporarily stopped selling certain policies that feature fully guaranteed death benefits, such as 30-year “term life” policies, a trend that could last until rates start to rise significantly, which may not be for years. Prudential reportedly raised April premiums on certain policies 8% to 12%, while other major insurers including AIG, Nationwide and Pacific Life reportedly are limiting the size of guaranteed universal life policies.
Policyholders who have “nonguaranteed” life insurance—such as universal life or variable universal life policies that do not guarantee fixed premiums and death benefits—might later discover that their policies are no longer sufficiently funded and at risk of lapsing.
What to do: If you already have a non-guaranteed policy, ask the issuer to send you an “in-force illustration showing all years out to policy maturity.” This will show you whether your premiums are still sufficient to prevent the policy from lapsing based on current assumptions. If they aren’t, your options might include paying higher premiums and/or decreasing the policy’s death benefit.
If you are in the market for life insurance, obtain quotes from multiple issuers. Different ones are responding to this unsettled market in different ways, so the policies you are offered could vary greatly.