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Now is the time to purchase, rewrite or refinance term life insurance

Edward Wallack

Do you own a life insurance policy? Have you recently done a review of your life insurance portfolio? Now is a better time than ever to sit down and revisit your policies because there are unique opportunities for individuals to purchase, rewrite or refinance term life insurance.

Many insurance companies are in the process of, or are continuing to increase pricing and/or withdrawing their lowest cost products. Depending on whether or not the bond, equity and credit markets continue to struggle or begin to improve, products that are available today may continue to be replaced with different product types in the future. The rate increases for term and other products that include contractual guarantees are anticipated to be in the double digits for some carriers.

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. A small percentage of term policies sold actually mature as a death claim.

Generally speaking, the longer the period of time before an insurer expects to pay a death claim, the lower the premium is each year. This is because the insurer can spread the cost of the death claim over a longer period of time and collect and invest premiums and grow the reserves to the amount needed to pay the death claims over a longer period.

In the past, life insurance costs/premiums had been generally decreasing as life expectancies had become longer. However, premiums for certain types of life insurance are now on the rise due to the fallout from the Sub-Prime Crisis , the continuing, volatile economic environment and the negative impact that the life settlement business has had on insurance carrier pricing models. Further, dividend interest crediting rates have experienced the largest decrease on average than in any year since 2002, affecting many whole life policies which were set up to “vanish” or “offset” premiums after a certain number of years.

Premiums have also increased over the past few years due to relatively new and more conservative reserving requirements under which the insurer must hold greater amounts of capital for each $1 of life insurance death benefit issued. The competitive positioning of term and no-lapse products is expected to continue to change throughout the remainder of 2009 and possibly into 2010. Future product changes could be minimal to severe based on the performance of the bond, equity and credit markets, as well as on each carrier’s capital, investment, reinsurance and risk management strategy.

The bottom line is that premiums for many types of life insurance products are increasing and will likely increase further. For example, ING suspended sales of their Survivor Universal Life Guaranteed Death Benefit product effective August 1, 2009 due to “lower investment returns and fewer, more costly capital sources.” Similarly, on August 1, 2009, American General replaced their existing Guaranteed Death Benefit Product (ContinUL Extend) with a new product (ContinUL Extend Plus), saying “the tight credit markets have dramatically increased the cost of obtaining capital support to meet reserve requirements on life insurance products with long-term guarantees”. The new product will have the effect of increasing the guaranteed premiums by 10-20%. Lastly, AXA actually pulled their Guaranteed Universal Life products from the market earlier this year.

When the life insurance companies talk about cost of capital, they are referring to Letters of Credit (LOC). LOCs are used by the insurers to help relieve the capital pressures created by the more conservative reserving requirements and the costs to provide these LOCs remain higher than when many of these products were originally priced. Based on the current economic reality, coupled with the past economic environment, the cost of LOCs has increased. As such, we have already seen prices/premiums increase for both fixed-duration term products (e.g., Level Year Term) and flexible-duration term products (i.e., technically referred to as universal life with secondary-death benefit guarantees or guaranteed UL).

Many who already own a competitively priced product are paying level premiums to maintain coverage for a certain period of time (eg. age 100). It is possible to substantially reduce current premiums and dramatically increase internal rates of return on the policy by directly structuring the premium payment stream in a manner much more favorable to the insured.

Why give the insurance company any more money that the absolute minimum? Let us help you to maximize your insurance portfolio. Sapers & Wallack has been in the life insurance business for over 70 years. Our mission is to help you find the right policy for yourself and your family. Please do not wait to call us if you have any term policies in your portfolio.

Ed Wallack is the President of Sapers & Wallack. He specializes in creative methods of designing life insurance and employee benefit programs to help businesses and their key executives solve their unique problems. If you would like to speak with Ed about any of these insurance options, please contact him at ewallack@sapers-wallack.com.