Low-Interest Rates and the Need for More Life Insurance Policy Reviews
Life insurance can play a crucial role in helping to preserve your client’s assets and achieve their financial goals. However, merely having insurance is not enough. We all know, the only constant in life is change, and we certainly are living in a time of tumultuous change. The Covid-19 virus has caused significant equity market turmoil sparking the Federal Reserve Bank to drop the interest rates to near zero. Covid-19 has forced congress to work on a bipartisan trillion-dollar economic stimulus to bail out companies and individuals impacted by declines in business and forced closures.
Regular reviews of life insurance are important but right now it is imperative that clients understand the sustainability of their insurance policies.
Three primary factors influence the sustainability of cash value life insurance: premiums, crediting rates, and policy costs. The interplay of these factors determines if a policy will be able to sustain coverage for the client’s desired holding period. That holding period is generally until death. Clients want their insurance policies to pay off at death, not lapse before. That means the policy must have adequate cash value to cover the cost of insurance throughout the insured life. Any point in time that the policy cash value fails to cover the policy costs, the contract moves into a 30 day grace period. To remedy the lapse, the policy owner has to pay enough in premium to cover the policy costs in arrears and for the future. Unfortunately, lapses that occur later in life are hard to rectify because the premiums required are generally quite large. A close analogy would be a loan where interest accrued due to a lack of loan payments causing an unaffordable balloon payment and subsequent default.
Why does this happen?
Lapses occur because of the factors premium, policy crediting rate, and cost of insurance change after the inception of the policy. Sustainability is a balancing act. Increases in crediting rates while the other factors are constant will grow cash value beyond needed levels to maintain sustainability.
Conversely, decreases in crediting rates will throw the cash value off track and threaten the sustainability of the policy.
Most, if not all, of these changes, occur slowly over the insureds lifetime. While the carrier sends annual statements, the nuances and results of the changes frequently go unnoticed by the insured/ policy owner. Without reviews, the impact of poor policy performance can compound until the policy lapses.
This article was not written to scare anyone. However, it has been designed to emphasize the need for a life insurance policy review right now.