Term life insurance rates are increasing for the first time in decades, and while the hikes have been modest, this may be the time to buy a policy.
“There is no more waiting for prices to go down,” says Byron Udell, founder and CEO of AccuQuote.com. “The best time to buy life insurance may have been yesterday, but the next best time is today.”
Unlike milk, gasoline and nearly everything else, premiums on term, or nonpermanent, life insurance have fallen by as much as 70 percent since their highs in the mid-1990s, according to Udell.
But that trend began to reverse itself earlier this year.
“Over the past six months, almost every carrier has had an increase of one sort or another,” says Alan Lurty, senior vice president and head of business development for ING U.S. Insurance.
The increases have been modest — 5 percent to 10 percent on average — but some analysts worry the change in direction could be long term.
Why rates fell
Three factors have worked to keep term life insurance premiums down for so long:
- People are living longer. There are two basic types of life insurance, term and permanent. With term policies, if you live through the length of your policy — typically 10, 15 or 20 years — the policy expires and the insurance company pays you nothing — although you may be able to convert it to a permanent policy. With permanent policies — universal life, whole life and variable life — your policy never expires and you make deposits into the account for the rest of your life. As life expectancy increased, more term policyholders outlived their policies, the companies made more money and they could lower their rates.
- The Internet boosts competition. In the late 1990s, shoppers started comparing life insurance companies, policies — and most importantly, prices — from the comfort of home, rather than visiting each provider’s office. The increased competition prompted insurance companies to trim premium rates.
- Booming stock prices. At first blush, this third piece of the puzzle may not seem to have anything to do with life insurance. But just think about what happens to your premium dollar.
“When companies bring in premiums, they don’t put it in a big mattress, they invest it,” Udell says. They use those investment returns to help offset the cost of insurance. Until recently, the insurance companies anticipated 4 percent to 5 percent investment returns each year. As the market boomed for years prior to the recent meltdown, those investments brought in big profits for the insurance companies and allowed them to hold down prices.
Why rates bounced
“The beneficial effect of falling mortality is being overwhelmed by the economic conditions over the last year,” Lurty says.
Following the body blows suffered by some of the world’s biggest financial institutions, including insurance giant AIG, investors became less eager to lend money at low rates.
“Anyone who sells term insurance needs to put up a significant amount of capital to cover those policies,” Lurty says.
Insurance companies use cash reserves and lines of credit to supply that cash, but after the government had to bail out massive financial institutions, those sources of cash either dried up or got much more expensive, he says.
“In some cases, we saw the cost of that credit go up two or threefold. In January there were even questions about whether credit was going to be available at all,” Lurty says.
And while the credit markets seem to be stabilizing, credit is still much more expensive than it was two years ago.
“Cost of capital has gone up, and that’s the bottom line,” Udell says.
The cost of reinsurance is going up, as well, says Steven Weisbart, senior vice president and chief economist at the Insurance Information Institute. Reinsurance is a type of policy insurance companies buy to protect themselves from large or catastrophic losses.
“That is a key cost of those lines,” he says. “As reinsurance gets more expensive, premiums go up.”
Meanwhile, the stock market has fallen from its high in 2007. The 4 percent to 5 percent baseline investment goal can no longer be counted on, Udell says, citing the sharp downward slide the stock market has taken.
“That means insurance companies have lost the ability to be bailed out by good investment results,” Weisbart says.
One thing that hasn’t changed is that the Internet continues to hold down prices through aggressive competition.
As a response to these pricing pressures, for example, ING U.S. Insurance boosted their rates earlier this year, but suffered an immediate backlash from buyers, Lurty says.
“Because the market was so competitive, our increase caused us to lose some market share. People stopped buying, and we have since dropped our rates accordingly,” he says.
A skyrocket it’s not
While the trend reversal is interesting, industry experts stress it doesn’t mean sky-high prices are coming.
“‘Creeping’ is probably a decent description,” Weisbart says. “Airlines do this every once in a while — they hike fares in response to rising costs and see if they can stick, only to retreat later.”
Maintaining perspective is important, Udell says. “You have to remember, while we are up a little off a historical low, it is still pretty close to the lowest rates we have ever seen.”
What’s more, the dollar amounts involved are still relatively small, Lurty says.
“We aren’t talking about a huge increase. In April we made an increase of about 5 percent. Think about something that is $20 per month, that cost may have gone up $1 per month,” he says.
What should YOU do?
Industry watchers say now might be the perfect time to get off the fence and buy a term policy.
Udell says this may be an excellent time to buy. Rates are still historically low, he notes, and as people age and develop health problems the more expensive it gets, regardless of pricing trends.
That also impacts whether you should “refinance” your life insurance.
For many people, today’s near-historic low prices seem tempting, especially if they had held policies for, say, 10 years. If you are still in the same or better health as you were a decade ago, dumping that old policy in favor of one with today’s low rates may make sense. But if your health has deteriorated, it’s probably wiser to hang on to that old policy.
“It’s going to depend on each case,” Lurty says.
The no-brainer decision, he says, is if you were thinking about buying more insurance, or if you didn’t have any life insurance to begin with. In either case, the sooner you lock in a rate, the better, he says.
Some economists, such as Weisbart, aren’t convinced today’s increases mark a long-term trend.
“The economic environment will improve — heaven knows when — but we won’t stay in this forever,” Weisbart says. “Mortality will continue to improve, and along with a more favorable economy and loosening credit, all that will work against prices continuing to rise in the long-term.”
What does seem to be clear, Lurty says, is that rates won’t be coming down over the short run. “Over the next six months to a year, term life insurance will continue to rise,” Lurty says. “Rates will clearly be higher, but how much is the matter of debate.”
You can compare term life insurance quotes on Insureme.com, a Bankrate company.