Life Insurance Premium Rates are Only Going to go Higher

Life Insurance Premium Rates are Only Going to go Higher
  • Opening Intro -

    Taking life insurance is one of the tougher decisions in personal finance.

    It's always easy to ignore it when one is young and starting out their career.

    The older one gets however, the more important a life policy becomes.

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However, for those who take it while older, there’s always the risk of paying more in premiums. To avoid higher premiums, most consumers would rather take it early. All in the hope that the premiums will remain manageable or constant.

You can imagine the shock to clients of companies such as Transamerica Life Insurance Company, which notified some universal life customers last year that their rates would rise by an estimated 38 percent.

For many of their clients, the increases were simply too much. Leading to cancelled policies and class action law suits against the company. You can learn more about the law suit here http://www.consumerwatchdog.org/newsrelease/transamerica-increasing-charges-life-insurance-policies-40-jeopardizing-coverage-after-d

Why are Insurance Companies Increasing Premium Rates?

For Transamerica Life Insurance company policy holders it looks like the company is simply a bad company. However, looking at the insurance industry worldwide, there is a bigger problem. Companies such as AXA Equitable Insurance also have class action suits against them after increasing their premiums https://globenewswire.com/news-release/2016/05/28/844150/0/en/Emerson-Scott-LLP-Announces-Class-Action-Lawsuit-Against-AXA-Equitable-Life-Insurance-Company-Regarding-Massive-Premium-Increases.html.

This phenomenon is likely to go on simply because of the very nature of life insurance products.

Consumers have a choice between universal life insurance and term life insurance. With term life insurance, the policy holder would pay a small premium for a period of time. After the period was over, the policy would end without any financial benefit to the policy holder. With Universal life insurance, the policy holder expects to earn an interest on part of their policy.

Insurance companies usually take the premium payments and promise a certain interest rate to the policy holder. They then invest in financial instruments that earn a higher rate of interest. This is usually government bonds or other instruments with a low risk.

In the 80’s and 90’s interest rates around the world were higher than today. It was not hard for the insurance companies to buy government bonds at 8% and higher while promising the policy holder 4% in return. As long as the policy holder kept paying and the interest rates remained higher, selling insurance policies was a profitable business.

Fast forward to the present where interest rates are below 1% and in some countries like Japan, negative. The insurance company still has to pay the policy holder 4% interest while the premiums can only attract less than 2% in interest. At this rate, most insurance companies relying on universal life insurance would fold in a few years. Their only alternative is to increase premium rates in order to survive.

What Does this Mean to Policy Holders?

Companies such as Transamerica and AXA have decided to increase premiums for their policy holders. This unfortunately for their clients leaves them with only two choices:

  1. Cancel their policies and get only a small amount of their investment
  2. Pay the increased premiums even though it hurts their budgets.

In the recent past most insurance premiums are pegged on the variable rates in the stock market. However, for insurance holders from the 80’s and 90’s there is very little they can do other than the two choices above. Of course law firms also consider class action suits as an option. The fact is that, the chances of higher insurance premium rates is higher.

Please share this article with your friends especially those with insurance premiums bought before the new interest rates. It can help them make a sound decision in their personal finances. It can also help you decide on the best insurance policy for your family.

 
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Last update on 2017-12-15 / Affiliate links / Images from Amazon Product Advertising API

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