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Will life insurers have to start charging higher premiums?

Life Insurance and Annuities
by Chris Davis
Veterans could face difficulties getting life insurance
Veterans could face difficulties getting life insurance

Life insurance companies have had a difficult time maintaining business in the past few years as a result of the economic downturn and many consumers turning away from these products because they viewed them as luxuries rather than necessities. Now, more trouble might be on the horizon, this time in the form of potentially massive regulatory changes.

The Financial Accounting Standards Board recently put forth a proposal that would change the ways in which companies deal with life insurance contracts, according to a report from Life Health Pro. While this change is mostly designed to help to normalize financial institutions' insurance policy valuation on a global level, it might also make it more difficult to predict profits going forward. That, in turn, could necessitate that companies issuing these policies will have to increase their premiums to be more assured of staying in the black where these issues are concerned. However, it's important to note that these rules would not go into effect until 2018.

Under the proposal, current generally accepted accounting principles allow companies to report income from premiums when the payments are received, but under the new rules, the income would have to be accounted for when the coverage was provided over time, the report said. Further, these would have to be revalued every quarter, increasing the regulatory burden on companies in general.

Another aspect of these policies that will have to be reevaluated every three months include assumptions that companies use to build reserves, and more of these factors will likely have to be applied in these calculations going forward under the FASB's proposal, the report said. In short, this new rule could theoretically change the ways in which insurance companies report nearly everything, including revenues and liabilities. In fact, any contract that involves insurance risk would necessarily be affected by the rule change.

The constant revisions to assumptions and other issues will, in turn, likely lead to more unexpected changes in profit projections, the report said. In addition to installing higher premiums as a means of insulating companies against potential shortfalls, these may also be necessary to cover the additional costs.

Because these changes, if accepted, would not go into effect until 2018, this gives life insurance issuers a little more time to begin building potentially attractive policies that could still draw in consumers even if they do carry a higher cost overall.

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