Posted by: Gary Thompson | November 12, 2012

The Perfect Storm

In the last 60 days, my email has been filling up with important notices from life carriers.  The messages vary from an increase in rates to elimination of specific products.  I thought that was a little concerning as we have enjoyed some of the lowest rates in years for life coverage.

It seems that the perfect storm has been brewing in the industry.  Mortality tables show that we are living longer than ever before due to improved healthcare and access to care.  (Certainly not due to improved habits and behaviors)  While enjoying greater longevity we have also enjoyed the lowest interest rates in history.  You may be asking yourself how living longer and low interest rates can impact my decision to purchase life coverage.  Great question!

Well, every life insurer has an actuarial formula that tells the underwriter how long you should live.  Can you believe there is a formula that says Joe should live until he is 72 and Sally will live until she is 74?  The scary part is the formula is pretty accurate!  For the sake of the story let’s refer to mortality tables as the ‘cold front’.

To have a perfect storm you need a warm and cold front to meet.  Here is where low interest rates come into the picture.  Insurers place premium collected into reserves as required by the state.  These reserves are then estimated to grow based on current interest rates and the market.  Basic math will tell us that a sum of money invested at 1% will not grow as quickly as money invested at 5%.  Let’s refer to low interest rates at the ‘warm front’.

When you pair increased longevity (cold front) with low interest rates (warm front) it creates the perfect storm for life insurance carriers.  People are living longer and the reserves are not keeping up with inflation at low interest rates.  This can only mean one thing; you guessed it, a change in policies and rates.  Carriers now have to modify plans that once offered generous guarantees and raise the rates on plans that have enjoyed the lowest rates in recent years.

The moral of the story is there is no time like the present to review existing policies and get moving on any new purchases.

In simple terms, AG 38 (actuarial guideline 38) is requiring insurance companies to retain a greater amount of reserves on their permanent life insurance portfolios.

Created in 2003, new updates set to take effect on January 1st, 2013.

Increased reserve requirements for all UL’s that use secondary guarantees and guaranteed terms.

Carriers will either update their products, discontinue some products, change their rates, change their compensation, change their guarantees, or a combination of these.

For more information please contact Gary Thompson at CS&A Insurance. Call Today at 1.800.999.1109! For more information on Social Security. For a Basic Life Insurance Quote.


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