ALERT: Sub-Prime Crisis to also INCREASE life insurance premiums?

Life insurance premiums/costs have/had been generally and consistently decreasing for decades. Of course, the largest cost in any insurance product is the cost of paying claims. In life insurance, this cost of insurance (or COI for short) is the cost of paying death claims. As people live longer, insurers pay fewer death claims in any given year, have longer before the death claim is eventually paid, and in some cases do not pay a death claim at all because the term of coverage expires before the death of the insured (e.g., 10-year term insurance).

Generally speaking, the longer the period of time before an insurer expects to pay a death claim, the lower the premium each year. This is because the insurer can both A) spread the cost of the death claim over a longer period of time and B) collect and invest premiums and grow reserves to the amount needed to pay death claims over a longer period. These are the reasons why a mortgage payment for a 30 year mortgage is lower than the mortgage payment for a 15 year mortgage.

For these reasons, life insurance costs/premiums have been generally decreasing as life expectancies have been getting longer. However, premiums for certain types of life insurance have already been on the rise in recent years and the Sub-Prime Crisis and current economic environment is likely to cause additional premium increases for both fixed-term (e.g., 10-year term, 20-year term, etc.) and flexible-duration term (i.e., technically Universal Life with Secondary Death Benefit Guarantees and commonly referred to as No Lapse Guaranteed UL -NLGUL) products.

Premium increases over the past few years were related to relatively new and more conservative reserving requirements (i.e., Regulations AXXX and XXX) under which the insurer must hold (i.e., reserve) greater amounts of capital for each $1 of life insurance death benefit issued. Now, premiums for both fixed-term and flexible-duration term products are likely to increase further due to the Sub-Prime Crisis and current economic environment, according to the October 10, 2008 issue of Standard & Poor's RatingsDirect.

This is because Letters of Credit (LOC) are used by the insurers to help relieve the capital pressures created by the more conservative reserving requirements. For reasons explained in this October 10, 2008 issue of Standard & Poor's RatingsDirect, with our current economic environment, the cost of LOCs has increased, and as such term product prices will likely increase early in 2009. It is also reasonable to assume flexible-duration-term (i.e., NLGUL) products will have a price increase as well.

In addition, Jim Benson, CEO of Benson Botsford LLC and past CEO of several of the largest life insurers in North America, forecasts “a significant return to conservative pricing of products due to insurers choosing solvency over sales and a reduction in their tail risk” (Valmark Securities 2008 annual continuing education conference) beyond this immediate pressure on the pricing and profitability of life insurance products caused by the Sub-Prime Crisis.

In fact, such price/premium increases are already under way. For instance, one of the consistently most competitively-priced underwriters of term insurance has already announced price increases that become effective December 15, 2008. So if you have clients who do not know what they are actually being charged for cost of insurance charges (COIs) and/or are considering a purchase of life insurance, it would be prudent to investigate best-available rates and terms (BART) before they change.

If you would like more information about BART for a particular client, then contact one of our Insurance Banking® Centers or contact us directly and we can refer you to the Insurance Banking® Center nearest to you. Also use the Confidential Policy Evaluator (CPE) Research Reports to determine the appropriateness of pricing, the reasonableness of performance expectations for invested assets underlying policy cash values, and overall suitability for you(r) clients' policies based on the 5 factors of suitability. Click here and get up to 3 Confidential Policy Evaluator (CPE) research reports under our NO-RISK trial subscription.