NEW YORK, October 12, 2005-Premium rates for individual life insurance-both term life and �permanent� insurance-are expected to drop by three percent in 2006, driven largely by significant mortality improvements and increased competition, according to the Insurance Information Institute (I.I.I.).
For term insurance, this continues a generally downward trend begun several decades ago, although the three percent drop projected for 2006 is considerably less than the annual average nine percent drop in the last decade, said I.I.I. economist Dr. Steven Weisbart.
Rate reductions for the best risks were even steeper, thanks largely to underwriting and pricing refinements. The effect of these forces drove the lowest rates available in 2005 to less than half of what they had been ten years earlier. Operational efficiencies and lower policy lapse rates also contributed to the forces resulting in the drop in life insurance premium rates.
The I.I.I. estimates that the annual premium for a 40-year-old male buying a $500,000 20-year level term life insurance policy in 2006 will be $641 if he qualifies as a �standard� risk and $352 if he meets the more stringent requirements of a �preferred� risk. Rates for women would be lower.
�With energy costs skyrocketing and interest rates on the rise, the drop in term life insurance rates couldn�t come at a better time for families with young children,� says Weisbart. �It�s especially important that they have life insurance to protect the income their dependents rely on.�
A study by Boston University professors Jagadesh Gokhale and Lawrence Kotlikoff showed that, even after accounting for Social Security survivor benefits and employer-provided (group) life insurance, among two-earner families if the primary earner dies, one in five would suffer a 40-percent-or-greater reduction in living standard because they don�t carry as much life insurance as they need. Another one in five would suffer a 20-percent to 40-precent reduction in living standard. With these lower rates, that protection is now more affordable.
Of course, you should not drop an existing policy that you plan to replace until you have a new policy in force. And you should not automatically replace an existing policy without understanding all of the issues that replacement entails�such as the start of a new incontestability period, says Weisbart.
Another factor in buying needed amounts of life insurance is the recent shift toward buying term life insurance rather than �permanent� life insurance, such as traditional whole life, universal life, or variable life insurance. About half of individual policies bought are now term policies, up from one-third in 1998. Because term policies basically provide a death benefit for a relatively short period of time, their premiums are lower than premiums for permanent life insurance, which pay death benefits no matter how long you live. If young families are buying term rather than permanent life insurance, their premiums can buy larger benefits for the period of their children�s dependency rather than smaller benefits for a longer period of time.
Looking forward, the increases in long-term interest rates that many forecast for 2006 should contribute to a drop in premium rates for traditional whole life insurance and its more variable brethren (universal life and variable universal life), according to Weisbart. On the other hand, a collapse in real estate prices could adversely affect those life insurance companies with significant investments in mortgages and real estate.
The demand for individual life insurance is expected to be strong, but it could be stronger. The number of individual life insurance policies bought each year averaged 17 million during 1970-1985 (the years when the baby boom generation had their children), trended downward to average 11.7 million per year during 1997-99, then rebounded to average 14 million per year during 2000-2005.
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The Insurance Information Institute is a nonprofit, communications organization supported by the property/casualty insurance industry. Visit www.iii.org
