US insurers are doing it once unthinkable, turning business away from some Americans who want a life insurance policy. The driving force behind the action: a collapse in interest rates linked to the spread of the new coronavirus and an expectation from insurers that rates have won rebound significantly at any time soon. Life insurers earn much of their profit by investing customer premiums in bonds until the maturity of the credits. In simpler terms, when they evaluate policies, they make assumptions about the amount of interest income they will earn by investing these premiums years into the future. The less they earn, the more they may need to cash in prizes or commissions to make a profit.
For now, a wave of emergency measures is hitting potential buyers although some companies are claiming that more consumers are looking for life insurance during the coronavirus pandemic. In addition to stopping sales of some popular products and raising prices, insurers are also scaling back policy sizes and reducing benefits.
"In 33 years, I have never seen more changes come faster to the life insurance products we sell," said Lawrence Rybka, president of ValMark Financial Group, an insurance broker in Akron, Ohio. "It is unprecedented how fast and widespread it is – it is through many couriers."
His staff have had a hard time keeping up with insurers' bulletins and have less time to redirect business to insurers who are still willing to issue certain types of large policies, he said. Historically, insurers would have granted a month or 60 days before a change took effect. Now two weeks are common.
Some insurers are reacting directly to the new coronavirus.
Penn Mutual Life Insurance Co., among others, has temporarily suspended sales of life insurance policies to people aged 70 and over and in poor health. Insurance executives say the analysis shows that older people with primary medical problems are dying at much higher rates from Covid-19 than young people.
In a note to brokers, Penn Mutual said he expected "to revisit these and other changes as we gain a better understanding of the impact of the Covid-19 pandemic."
David Hungerford, 72, was among those who pushed to move quickly between changes and bought a $ 1 million policy from Prudential Financial Inc. last month
Hungerford, the owner of a package design company in Southern California, said his broker advised him to act quickly due to impending premium increases. Calling buyers of life insurance "collateral damage" of the ultra-light interest rates, he said he hastened to conclude a medical exam.
"I was concerned about my global portfolio of equity market assets and I wanted to depend on another portfolio" for his wife's financial protection, he said of his desire to purchase the policy.
Prudential, the nation's largest business life insurer, told brokers in a March letter that its late April rate increases from 8% to 12% on the type of policy Mr. Hungerford purchased and other actions. "it put us in a much better position to resist the low interest rate environment."
The insurer also temporarily suspended sales of 30-year "life" policies, a popular offering among young families, confirmed a spokesman. These policies provide a basic death benefit during the years in which they raise their children. Prudential has also reduced the amount of interest it is attaching to certain savings-and-death-benefit "universal life" policies.
Typically, life insurers hold approximately 70% of their general investment account in long-term bonds. In general, the returns on these holdings, many of them corporate bonds, follow the 10-year US Treasury. Its annual return has been largely down since the 1980s, when it peaked at almost 16%.
Yield declined after the 2008-2009 financial crisis and dropped to 1.36% in 2016 before rebounding to around 3% in 2018. In March, it collapsed again as the coronavirus triggered a rush to safer assets and investors feared that the Federal Reserve would cut interest rates.
Friday's yield: 0.679%.
Corporate bond yields have held up better than in the past 10 years, but the general trend has been tough for life insurers. Last year the net return on the life insurers portfolio was 4.4% on average, down from 9.9% in the mid-80s, according to rating company A.M. Best Co.
Some insurers are now dismissing the deals they consider the most risky. American International Group Inc., Nationwide Mutual Insurance Co., Pacific Life Insurance Co. and Principal Financial Group Inc. are among the large insurers that have limited the size of so-called universal guaranteed life policies, which are highly sensitive to low interest rates.
The guarantee is a promise that the annual premium bill will never increase during the owner's lifetime. This means that the insurer is on the alert for any shortage of interest income over the years. Consumers run the risk of premium increases in other types of universal life to make up for those shortcomings.
A national spokesman said that insurer prices and product adjustments were motivated by "extremely low interest rates and market volatility which drives up the costs of our hedging instruments and [the] landscape in evolution relative to Covid-19 ".
Mark Chandik, president of FDP Wealth Management in Irvine, California, said that many carriers suspended price collection and re-rigging of offers immediately after 2008-2009, with the belief that rates would soon rise. They gradually made changes when low rates persisted for years.
In this crisis, "they see no end in sight and rush to react to this," he said.
Over the past decade, life insurers have compensated for earnings pressure by distributing money into a triple B debt with higher returns, but potential downgrades in the worsened economy could put some insurers on hold, said Tracy Dolin -Benguigui, senior director for North American Insurance Ratings at S&P global ratings.
Some insurance products that pay interest to consumers will experience a significant drop in sales, he predicts. "It becomes extremely difficult to provide a decent multi-year guarantee when faced with the prospect of zero or even negative rates," he said.
In another example of how low interest rates are passed on to consumers, payments related to "life annuities", also known as "immediate annuities", have decreased by 24% since 2005, industry data show. A 70-year-old man who invests $ 100,000 in one of these lifetime payments contracts would get $ 556 per month today, down from $ 730 per month in 2005.
Some industry executives hope that a positive result of the Covid-19 riot is a greater appreciation for life insurance.
"Superlative interest rates today are certainly not good for Americans who want to save money or for the life insurance industry in general, but the value of security products with guarantees will increase in this unpredictable environment," said Theodore Mathas, president. elected to the American Council of Life Insurance business group and CEO of New York Life Insurance Co.
Some insurers claim to already enjoy increases in sales. 164-year-old Northwestern Mutual Life Insurance Co. said April was one of its best five months ever, measured by the number of new customers buying various types of insurance, up 33% from the previous period. Haven Life, an online unit of Massachusetts Mutual Life Insurance Co., recorded a 42% increase in forward sales in March.
Sales in some companies with product changes have been increased by buyers who have tried to anticipate deadlines.
Alan Boudreau, 51-year-old owner of an infrastructure piping company in southern California, said he was "a little wary" about committing a multi-million dollar prudential policy in March, with the development of economic damage by Covid-19.
"I was dragging my feet," he said. But with the changes in sight, "we decided it was smart to move on now rather than wait along the way."
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