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Thayer Partners Blog

The Coming Crisis in Life Insurance and How It Will Hurt You

[fa icon="calendar"] Oct 14, 2016 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

The-Coming-Crisis-in-Life-Insurance-and-How-It-Will-Hurt-You-.jpgThere are many reasons to buy life insurance. It’s fundamental and indispensable to any sound financial plan. It will pay off a mortgage, replace lost income, or cover your children’s college tuition. It can replace a spouse’s income, pay off debt business debt, buy out a business partner, pay off estate taxes, and more.

There’s no doubt that life insurance is a necessity, especially as you grow older and identify major risks to your plans for retirement. But there’s a coming crisis. And it may hurt you.

A Change in the Status Quo

You count on your life insurance to protect your family’s financial well being. You pay your premiums like clockwork as you have for years—maybe even decades. But one day soon, you might get a letter in the mail informing you that your premiums are going to rise sharply, maybe even sixfold.

Can you afford this rise in premiums? Have you prepared? If not, you’re not alone.

Historically Low Interest Rates

Many life insurance policies include investment accounts that accumulate cash when interest rates are high or even average. Unfortunately, since the 2008 global financial crisis, interest rates have been declining steadily, and they’re now at historic lows—and experts expect rates to stay low for a while. In some places, these interest rates are near zero; in others, they’ve even turned negative.

And this is contributing to a crisis for life insurance companies around the world. An industry that used to be considered a bedrock of financial stability that supports the retirement of millions of hard-working citizens is now threatened by this “lower for longer” interest rate environment.

The Challenge of Low Interest Rates for Insurance Companies

Though low interest rates are good for some—like homeowners and borrowers—they’re bad news for insurers who have more than three-quarters of their invested assets in bonds.

Companies that sell policies that run for decades, like life insurance and long-term care insurance, simply do not know how to fund policies that were sold years ago, when actuaries couldn’t imagine a world with interest rates as drastically low as they are today.They do not know how to back a four percent guaranteed annual return promise in a two-percent-or-less environment.

In addition, these companies are struggling to figure out what to sell now, when rates aren’t expected to return to normal levels anytime soon.

Trouble Paying Dividends

In addition to low interest rates, insurance companies are also juggling to pay dividends to their shareholders. Some have engaged in complicated financial maneuvers in order to be able to maintain the hefty dividends. And this typically involves taking unhealthy risks.

How This Crisis Might Hurt You

Insurers in the U.S. have stopped selling certain products and raised premiums for existing policies in an attempt to stave off a reckoning.

Thus, if you planned for the unexpected early on in life and bought a universal life policy, for example, with a guaranteed annual return in the ‘80s or ‘90s, then you may well see your premiums soar, if they haven’t already. Even if you were promised that they would never go up, there is buried in the insurance contract you signed a clause that allows insurance companies to raise premiums.

The crisis is already occurring, and many lawsuits have been filed against insurers for this reason. Some lawsuits claim that life insurance companies are increasing premiums to force people to drop their policies because they can’t afford to pay for them anymore. A canceled policy would mean that the insurance company would be able to keep years—or even decades—of premiums without having to face a future payout. Other lawsuits claim that insurers are raiding their policies in order to pay shareholders’ dividends. 

As insurance companies attempt to get out of their promises, you may lose the future security you have been paying for all of these years. If you have life insurance policies that were issued 10 or more years ago, have a professional review the policy and lay out your options.


Topics: Financial Planning

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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