NEW YORK, Oct. 5 – Premium rates for individual life insurance – both term life and “permanent” insurance – are expected to drop by three percent in 2006, driven largely by significant mortality improvements and increased competition, according to the Insurance Information Institute (I.I.I.).
For term insurance, this continues a generally downward trend begun several decades ago, although the three percent drop projected for 2006 is considerably less than the annual average nine percent drop in the last decade, said I.I.I. economist Dr. Steven Weisbart.
Rate reductions for the best risks were even steeper, thanks largely to underwriting and pricing refinements. The effect of these forces drove the lowest rates available in 2005 to less than half of what they had been ten years earlier.
Weisbart said much attention has been focused in recent years on the increase in life expectancy of people reaching retirement age, since many people haven’t saved enough money to finance a two- or three-decade retirement span. But death rates at the main life-insurance-buying ages have been coming down significantly, too, he said.
Consider the following life expectancy data from the National Center for Health Statistics:
Median Age to Which Men and Women of
Specified Starting Ages Were Expected to Live
In the last 25 years, for example, the (median) life expectancy for 25-year-old males – the age by which half of the group will have died and the other half will still be alive – has risen by nearly four years from 72.4 to 76.3, Weisbart said.
The downward trend in premium rates was interrupted briefly in 2004 as the result of new reserve requirements for term insurance and higher reinsurance prices. The new reserve regulations are expected to somewhat offset gains in mortality and lower operating expense improvements in 2006 and future years.
The I.I.I. estimates that the annual premium for a 40-year-old male buying a $500,000 20-year level term life insurance policy in 2006 will be $641 if he qualifies as a “standard” risk and $352 if he meets the more stringent requirements of a “preferred” risk. Rates for women would be lower.
“With energy costs skyrocketing and interest rates on the rise, the drop in term life insurance rates couldn’t come at a better time for families with young children,” said Weisbart, economist for the I.I.I. “It’s especially important that they have life insurance to protect the income their dependents rely on.”
A study by two Boston University professors showed that, even after accounting for Social Security survivor benefits and employer-provided (group) life insurance, among two-earner families if the primary earner dies, one in five would suffer a 40-percent-or-greater reduction in living standard because they don’t carry as much life insurance as they need.(1) Another one in five would suffer a 20-percent to 40-precent reduction in living standard. With these lower rates, that protection is now more affordable.
“In recent years when long-term interest rates fell, many homeowners with older mortgages re-financed them to lock in the lower rates,” said Weisbart. “Now those with life insurance they bought years ago can shop around to determine whether they can do a similar thing, either to lower the amount they’re spending on life insurance or buy more protection for little or no additional cost.”
Of course, people should not drop an existing policy that you plan to replace until you have a new policy in force. And you should not automatically replace an existing policy without understanding all of the issues that replacement entails – such as the start of a new incontestability period, he said.
Another factor in buying needed amounts of life insurance is the recent shift toward buying term life insurance rather than “permanent” life insurance, such as traditional whole life, universal life, or variable life insurance. About half of individual policies bought are now term policies, up from one-third in 1998. Because term policies basically provide a death benefit for a relatively short period of time, their premiums are lower than premiums for permanent life insurance, which pay death benefits no matter how long you live. If young families are buying term rather than permanent life insurance, their premiums can buy larger benefits for the period of their children’s dependency rather than smaller benefits for a longer period of time.
Premium rates for traditional whole life insurance and its more variable brethren (universal life and variable universal life) are driven by expected investment returns as well as by the same forces that affect term rates, he said. The increases in long-term interest rates that many forecast for 2006 should contribute to a drop in these premium rates, said Weisbart. On the other hand, a collapse in real estate prices could adversely affect those life insurance companies with significant investments in mortgages and real estate.
Operational efficiencies and lower policy lapse rates have also contributed to the forces that have resulted in drops in life insurance premium rates. The drop in lapse rates is encouraging. After averaging 8.75 percent from 1995 through 2000, lapse rates dropped to 7.7 percent in 2001 and 2003. A drop of one percentage point in the lapse rate means that roughly 1.7 million policies continue in force that would have been discontinued at the higher lapse level.
The net effect of regulatory changes in 2006 could increase the drop in premium rates or negate it. New regulations for universal life products with guaranteed minimum benefits are expected to require stronger reserves, which could stiffen or raise rates for these products. On the other hand, if the option of a federal charter – with its promise of lower compliance costs – becomes available, this could produce savings that are passed along to policyholders.
The demand for individual life insurance is expected to be strong, but it could be stronger. The number of individual life insurance policies bought each year averaged 17 million during 1970-1985 (the years when the baby boom generation had their children), trended downward to average 11.7 million per year during 1997-99, then rebounded to average 14 million per year during 2000-2005.
(1) “The Adequacy of Life Insurance,” by Jagadesh Gokhale and Lawrence Kotlikoff,, Research Dialogue #72, published by the TIAA-CREF Institute, July 2002.