With stock market fluctuations and a possible recession looming, it’s natural to wonder if it might affect life insurance rates.
If you had “buy life insurance” on the to-do list of 2020, you might be asking yourself whether it’s still a good time to take out a life insurance policy. We’re going to be experiencing the effects of the COVID-19 pandemic for a while, after all — and those effects already include an economic recession, at least in the short term. Does that mean it’s a bad time to buy a life insurance policy? Are you going to get stuck paying higher rates for coverage?
Not necessarily. Recessions don’t affect life insurance policy rates as much as you might think, especially if you elect to protect your family with a term life insurance policy. Whether or not there is economic uncertainty, buying life insurance now, when you need it, is still a smart financial move.
Here’s what you need to know about how life insurance companies price their policies, why term life insurance policies are less affected by economic fluctuations than permanent life insurance policies, and what you can do to get the most affordable life insurance policy possible.
How life insurance companies price their policies
Your life insurance premium rate is determined by your age, health history and tobacco use. However, life insurance policy rates, as a whole, are determined by the profitability of a life insurance company, which is generally affected by three main factors: mortality rates, company expenses and the interest rate environment. When a company’s profitability goes down, its policy rates might go up.
Short-term economic volatility doesn’t typically affect life insurance policy rates. If an economic recession looks like it might last for a longer period of time, life insurance companies might begin to increase rates to maintain profitability — but if this happens, term life insurance policies will experience smaller rate increases than permanent life insurance policies.
Term life insurance rates generally remain stable
Term life insurance policy rates tend to remain stable even during periods of financial crisis. Why? Because these policies cover individuals for a short period of time relative to permanent insurance — usually 10, 15, 20 or 30 years, depending on the coverage you choose. Permanent policies, on the other hand, cover you for a lifetime, so as long as your coverage remains in good standing, there is a 100% chance the insurance company will pay out a death benefit at some point.
These shorter term lengths protect both the consumer and the life insurance company from economic fluctuations.
This is why life insurance companies are comfortable offering affordable term life insurance policies even during recessions and when people are unemployed. Since each policy provides coverage for a defined period of time, the insurer isn’t taking on as much risk that they’ll lose money if the economy declines long-term.
Consumers also get to benefit from the low risk factor that affordable level premium term policies provide — once you complete your term life insurance application, you’ll secure a monthly premium that will remain constant for the length of your insurance policy.
Your term life insurance premium won’t change
When you buy level premium term life insurance, you lock in your premium rate for the length of the term — called “guaranteed level premiums.” In other words: If you buy a 10-year term life insurance policy, you pay the same monthly premium for the full 10 years, no matter what happens to the economy during that period. If you decide to protect your family with a 30-year term life insurance policy, your premium rate will stay the same, every month, for thirty years.
How many other products can offer the same guarantee? Term life insurance is designed to fit into nearly every budget, and the security of knowing that your premiums won’t increase due to inflation, recession or any other economic issue can provide just as much peace of mind as the policy itself.
Permanent life insurance can become more expensive during economic uncertainty
Unlike less interest rate sensitive products like term life insurance, permanent life insurance policies — common types being universal or whole life insurance — are more likely to see rate fluctuations during a period of economic uncertainty.
Permanent life insurance policies protect the policyholder for a lifetime and some products offer long-term cash value guarantees. These guarantees can be costly for life insurance companies in the current market environment. In a lower interest rate environment paired with economic uncertainty, life insurance companies can be impacted by reduced profitability or even losses on these products, and as a result, rates will likely increase.
Premiums will not change for existing permanent life insurance policyholders with level premiums — which is the case for most whole life insurance policies.
However, some universal life insurance products may have premiums projected based on a higher assumed rate of return than is the current reality. Permanent policyholders should review their coverage with a financial professional to ensure policies don’t lapse prematurely and to understand how a low-interest-rate environment may impact their coverage.
Buying term life insurance early can save you money over time
The best way to keep your life insurance rates low is to buy your term life insurance policy early. Signing up for a term life insurance policy when you’re young and healthy can save you a lot of money over time.
For more information about Life Insurance call JCT Insurance Agency at (626)354-2000 or email jctfinancialsvc@gmail.com