The life insurance industry has been having some difficulties with investment returns due to the low interest environment for quite a while now, shrinking the profitability present on existing insurance policies. These difficulties brought forth by the difficult economic conditions over the last few years have led some insurance companies to consider increasing the cost of insurance rates on existing universal life insurance contracts, which for some policyholders may have been purchased decades ago.
Interest rates have been low for some time now, and that has put a bit of a hurt on life insurers when it comes to the investmenter returns the obtain on universal life insurance policies, according to a report from the Wall Street Journal. To that end, some insurance companies are now starting to notify policyholders that they are raising the rates they pay for coverage, which is technically allowed in the language of their contracts but a step that is rarely if ever utilized by insurers.
What's the issue here?
The fact of the matter is that costs for universal life policies specifically are creeping up like this because since the interest rate earned by the insurance companies, as well as differences in realized lapse rates and mortality rates over what was originally assumed in pricing, has diminished profitability on these products. Moreover, it's believed that these changes will impact older Americans who are likely to be living on a fixed income at this point, making such policies difficult for them to afford.
In addition, many within the industry expect that the incidences of these rate hikes will only increase in the future, the report said. On top of that, it might not be just universal policies that end up being subject to those changes as time goes on, either. Lawrence Rybka, president of an insurance and brokerage firm in Akron, Ohio, told the newspaper that as long as rates stay low, "all bets are off" in this regard.
What's the impact?
For individual consumers, it's hard to pin down exactly how much such a rate hike is going to cost them, as these are largely going to be dependent upon both their insurers' mindset and the value of their policies, the report said. The range for these increases has been cited as somewhere in the 5 percent range to as much as 200 percent, given a number of circumstances. For some people with relatively small policies (in the $250,000 range) could see their rates rise only about $12.50 per month, or $150 per year. However, those with policies as high as $10 million could see rates rise to the point that they're paying hundreds of thousands of dollars more than they were previously.
This is an issue life insurers will likely have to discuss with not only existing clients, but potential new ones as well, because clients may be concerned regarding potential premium oncreases going forward.