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Fed to raise interest rates this year, could boost life insurers

Life Insurance and Annuities
by Scott Morrow
Fed to raise interest rates this year, could boost life insurers
Fed to raise interest rates this year, could boost life insurers

There have been various reasons that life insurance companies have taken a bit of a hit in the last several years, both during and following the recession. Among these might be that many Americans saw the low interest rate environment, and the crediting rates associated with some life insurance products, as a reason not to purchase certain interest driven life insurance products. However, recent news from the Federal Reserve Board may serve to once again buoy sales of life policies, as interest rates could rise again later this year.

Following months of speculation about the ways in which the Fed will continue to scale back its bond-buying efforts, which have been so prevalent in the market for some time now, Charles Evans, the president of the Federal Reserve Bank of Chicago, recently stated that interest rates could rise appreciably in the second half of the year, according to a report from Bloomberg Business News. However, the time at which this will happen remains a little bit up in the air, since it will be based on inflation rates seen over the rest of the year.

What does that mean?
Evans told the news agency that the rate of inflation will probably start to increase in the coming months, echoing the sentiments of new Fed chair Janet Yellin earlier following a meeting of the Federal Open Market Committee, the report said. At that time, she said the central bank is likely to wait another six months after it finally ends its bond-buying initiative to raise the main interest rates. Evans further added that this might not happen until the second half of 2015, but that he would wait longer if it were his decision alone. By the end of 2016, he believes rates will climb to about 1.25 percent.

Essentially, the Fed feels as though it is under no obligation to raise rates steadily at every meeting of the FOMC, the report said. However, that does seem a more likely path than making one or two single, sharper increases during the next year and a half or so.

As insurance companies begin to understand more about the direction and strategy that the Federal Reserve Board plan on implementing going forward, this will allow the company to adjust their investment strategy accordingly.  It will also help the insurance companies to potentially make adjustments to product features and crediting rates going forward to match with the investment strategy, and in the process attract new customers.  With more of a chance for seeing a stronger return on investment, they may further be interested in purchasing more coverage than they would have in the past few years.

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