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Why Life Insurance Rates Go Up

Written by Aaron Pinkston, Thu, Oct 15 2009

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There are two factors that will cause life insurance rates to go up in the future for you. One being the overall economic situation that began in 2008. The other factor has more to do with you as a person.

I am not saying that prices on existing policies will go up (as long as it is guaranteed not to), but I am saying that now is probably a better time to buy a life insurance policy than three years from now. The factors that make life insurance less expensive are going the wrong direction for you. Let’s examine why.

Specifically, those reasons are:

  1. The economic conditions of the economy and the life insurance carrier that holds your policy and
  2. Your own personal risk profile.

Economic and business Reasons

When a life insurance carrier prices a policy, they think about how much money they have to set aside to pay future claims, how much money doing business costs, and how much money their investments return. I’m simplifying this a little for the purpose of this post, but this is the gist of it. Let’s look at these one by one.

A large part of the premiums we pay to life insurance companies goes towards a large savings account to make sure there is enough money to pay claims now and in the future. Knowing how much money to save for the future gets tricky sometimes because none of us has a crystal ball. Still, one of the primary factors effecting future claims is how many policies will still be active when the insured dies – internally called the lapse ratio. If the lapse ratio is low, then more and more families will be able to collect on the policy as their loved ones pass on. With low lapse ratios, life insurance companies need to set aside more money to pay future claims.

Unfortunately for you, there have been a series of very large life settlements, premium financed policies, investor-owned policies, and more that lead to low lapse ratios on policies with face amounts well into the millions. A few of these wouldn’t be a problem for a well rated life insurance carrier, but a growing trend means rising prices for you.

Fortunately, the cost of business is going down due to increased efficiency with medical information, automated decision-making software, and more transparent competition from places like Clarifinancial. Hey, I’m trying to do my part.

Still, life insurance companies are not making nearly as much money on their reserves and other investments as they once did. There are strict requirements about how a life insurance carrier may invest its money, so the reduction in profits here is very limited. However, on a large amount of money, a 1-2% reduction in profit means serious money that future premium payers will notice.

Personal Reason

While I could not say conclusively that your life insurance rates will go up because of personal reasons, they probably will. We are all getting older – age is the single largest component to our mortality – and most of us are falling apart in our age.

If you have a cancer history, cardiac history, or recent diagnoses of a disease or disorder, the time a few more years gives you might actually help improve things. But for most of us, our profile to an underwriter looks worse and worse as the years add up.

That’s why you need to examine your life insurance policies now. As higher insurance rates loom on the horizon, no one knows how long it will be before prices go up. Take a look at your policies today to see if securing new coverage now makes more sense than waiting.