Low Interest Rate Environment Affects Some Life Insurance Policies

by: Smith and Howard Wealth Management

On August 1, 2015, Transamerica Life Insurance Company raised the amount that they deduct monthly from the policy’s accumulation value. This impacts several life insurance products issued between 1987 – 1998. In their announcement about the increase, they stated that in some cases, the increase would be significant.  The result of this could mean that policyholders will either have to resume or increase their premium payments, or decrease their coverage amount or duration.

This situation serves as a stark reminder that the continued low interest rate environment has created immense profit margin pressure on the carriers. Older policies that have higher guaranteed rates of return are becoming increasingly difficult to manage. New money flowing in cannot earn the same rate of return without additional risk.

What does this mean for most policyholders?  Clients should have their insurance portfolios reviewed just as they would any other asset. Most policies are acquired based on long-term performance expectations that are often misunderstood to be guarantees. Many clients believe that if they pay their premiums every year, everything will go as planned. They are often unaware that the policy’s internal financial components are constantly shifting in response to factors such as interest rates, capital markets, and mortality expenses. The Transamerica announcement drives home this point.

What should a review encompass? A thorough review of one’s coverage will: 1) examine the current value of the existing policies; 2) give a historical perspective on the existing policies; 3) provide a future outlook of the policies based on the post-acquisition performance;  4) assess the risk embedded in the current insurance portfolio; 5) benchmark the existing policies against the current market place; and 6) provide an assessment of the carriers’ ratings and financial strength.

In the investment management world, there is an industry-wide standard of periodically reviewing portfolios. No such trend has emerged in the insurance industry. This widespread lack of awareness can lead to unnecessary risk that can be avoided with proper vigilance. A proper review is much more likely to keep your coverage on track, and allow it to serve the purpose for which it was intended.

Since we don’t sell life insurance, we can offer an objective overview and opinion of your life insurance situation with guidance on what to look for or change (if anything) in your coverage. Please contact us at 404-874-6244 to schedule a review of your life insurance coverage.