THREE REASONS LIFE INSURANCE PRICES ARE SHOOTING UP

Warning: this post may be scarier than Halloween and encourage you to buy life insurance now. Reader discretion is strongly advised.

Major price increases are coming to some permanent life insurance plans. Manulife is projecting increases of 10% on average on their level-for-life rates. That's hefty. Expect to pay more if you're younger or female or buying for family estate planning. The changes take effect on December 4, 2010. Expect other companies to follow.

Here are three reasons for the price increases

1. low interest rates
2. tougher international standards
3. copycats

Low Interest Rates

Each year, we're closer to death (see Pink Floyd's insights on mortality). Your insurance rates should increase annually to reflect this, but if they did, you'd have trouble paying the premiums in future years when a claim is most likely. You see this pattern and problem with Term 10 insurance.

For permanent insurance, a consumer-friendly solution is level premium rates guaranteed for life. This sound choice doesn't seem to be widely offered outside Canada.

Here the insurer charges "too much" now and "too little" later. In the early years, the money which isn't need to cover the year's insurance charges gets invested to cover the shortfall in later years.

In a sense, the insurer is "buying term and investing the difference". Investment returns are important and have been lower than assumed in the product prices. The consequence is higher rates.

Tougher International Standards

Because of the world's recent financial woes, new International Financial Reporting Standards (IFRS) are on the way. The goal is to have companies set aside more capital in safer, lower-yielding investments. The intentions are good, but this increases costs which increases prices.

Canada didn't have problems with dumb money but is getting treated as guilty too. Higher prices for you.

Copycats

Okay, prices need to increase. What's the right amount?

The answer varies for each company depending on factors like their size, costs, claims experience, target markets, and — the biggest factor — competition. If a market leader like Manulife is boosting rates by about 10%, other companies aren't likely to stop at 7% or go up to 12%.

For an analogy, let's go to the gas pumps. Gas companies are eager to charge more but no one wants to be the first to raise prices. But when one moves, the rest quickly follow. Insurers are the same way.

Unlike gas stations, insurers can't raise prices instantly. The process often takes months because changes are needed to the

• projection tools used by advisors
• administration systems
• marketing material (since other changes will probably be made at the same)
• reinsurance treaties (arrangements with the insurers that insure the insurers)

So the first company to raise rates gets criticized and loses business. Other companies get rewarded while they scramble to do copy. To minimize the pain, the first mover tends to preannounce rate hikes to give competitors time to prepare.

Versa Vice

It's funny to watch price decreases. Yes, they do happen sometimes.

Here companies are secretive. They don't want competitors to know. They don't want advisors to hold off on sales until the new version arrives. Here the first mover wins since advisors can instantly switch to its products while competitors take months to react.

Competitors are eager to increase prices but sometimes defer price cuts until they see they're losing enough sales to matter.

Term Insurance

If you have term insurance you aren't directly affected … unless you decide to convert to permanent coverage. You pay premiums for the same risk class. So if you were an elite nonsmoker, you'll stay in that class even if your health and habits make you a bigger risk. That's the good news.

You may not realize that the rates on the new plan are based on your age at the time of the change. Also, you can only get permanent insurance from the same company. So you're affected by the whims of the market until you lock in the new rates.

Your Next Step

If you might be affected by rate hikes and have a proactive advisor, you probably already know.

You lose by waiting to get life or health insurance because, you're getting older: your premiums will go up even if your health doesn't deteriorate. Why be like the two who waited? They're no longer insurable.

Links

• Manulife hikes permanent life rates (Toronto Star, Oct 2010)
• How Pink Floyd's insights on mortality help you
• Jim Flaherty on the economy and financial literacy
• Dumb money 2009: what went wrong?
• The tale of two who waited
• Why life insurance premiums are rising (Moneyville.ca, Aug 2011) (new) 
• The perils of whole life insurance (new) 
• image courtesy of Martine Lemmens (Belgium)

Podcast Episode 90 (6:03)

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PS Happy Halloween