September 21, 2007
Dr. Steven Weisbart, CLU
Vice President and Chief Economist
Premium rates for individual term life insurance in 2008 are expected to drop, on average, about 1 percent from where they are in 2007, after many years of larger year-to-year reductions.
The generally downward trend began several decades ago. Since 2000, term insurance rates dropped about 4 percent per year on average, following an average annual 15 percent drop from 1994-1999. The effect of these drops drove the lowest rates available in 2007 to less than half of what they had been a dozen years earlier.
The I.I.I. estimates that, for example, the annual premium for a 40-year-old male nonsmoker buying a $500,000 20-year level term life insurance policy in 2008 will be about $725 if he qualifies as a “standard” risk and $350 if he meets the more stringent requirements of a “preferred” risk. Rates for women and younger people would be lower. For example, the comparable rate for a 40-year-old female nonsmoker would be about $600 for a standard risk and $300 for a preferred risk.
Premiums for smokers buying term life insurance will be higher than for nonsmokers. For example, for the same $500,000 20-year level term life insurance policy in the examples above, a 40-year-old male smoker who otherwise qualifies as a preferred risk would pay about $1,400 (or about $1,775 if he qualifies as a standard risk). Comparable premiums for a female smoker who otherwise qualifies as a preferred risk are $1,000 or $1,350 for a standard risk. These premiums are virtually unchanged from last year.
Most parents with young children buy term life insurance: A 2005 study by LIMRA International showed that, of those who bought life insurance in 2003, 72 percent of married couples and 66 percent of single parents bought term. This provides the highest protection amount for a given premium dollar. In married-couple households without children, about half buy term and half buy permanent policies. In other households without children, 7 in 10 buy permanent life insurance, with traditional whole life the most common (41 percent of households in this category).
Premiums for traditional whole life insurance and its more variable brethren (universal life and variable universal life) are influenced by expected investment returns as well as by the same forces that affect term rates. However, a year ago many experts were forecasting increases in long-term interest rates that did not occur. The lower interest rates that did occur offset the effects of mortality improvement for premium rates for permanent life insurance policies. For the rest of this year and 2008, the latest monthly median forecast published by Blue Chip Economic Indicators is for long-term interest rates to stay about where they are now, implying little change in rates for permanent life insurance policies in 2008.
Mortality Improvements. Much attention has been focused in recent years on the increase in life expectancy of people reaching, or living for a long time in, retirement. But death rates at the main life-insurance-buying ages have been coming down significantly, also. For example, the age-adjusted death rates per 100,000 population dropped between 2003 and 2004—the latest data available—for the main life-insurance-buying age groups as follows:
Greater Efficiency. The industry is also more operationally efficient now; for example, as a percent of total premiums, home- and field-office expenses dropped from 10.1 percent in 1995 to 9.0 percent in 2005, according to I.I.I. calculations based on ACLI data. This drop is due, in part, to mergers and in part to technology investments. In fact, these two developments reinforce each other, as the greater scale that mergers provide both creates the opportunity for the merged whole to adopt the best practices of, and eliminate duplication in, the previously separate companies, and it also helps justify investments in technology that create additional efficiencies. Continued merger and acquisition activity in the industry is expected in 2008.