Changing Times, Changing Life Insurance

During periods of substantial change like the “great recession”, consumers have reevaluated many of their spending habits.  Everything from eating out three times a week, to reducing the number of trips in the car is up for review.  Americans lucky enough to have a job are scrutinizing nearly every purchase.  This ongoing uncertainty is placing a drag on the recovery.

Like consumer products, financial products have not gone unscathed either. Many mutual funds have experienced increased share redemption.  Many banking institutions that received unfavorable press have seen withdrawals to transfer funds to other banks that were considered stronger, even though the FDIC was insuring the deposits.

Term life insurance has experienced an uptick in sales, for a number of reasons.  First of all, the price of term life insurance has never been lower.  The competition in this industry has served the buying public well.  Due to transparency brought on by the internet, buyers are gaining access to multiple life insurance companies premiums easier than ever.  In the book, Freakonomics, authors Steven Levitt and Stephen Dubner discuss how “information asymmetry” has been eliminated within the term insurance industry.  Information asymmetry is the dynamic that occurs when one party has a superior level of information and power during a transaction.  The openness caused by the now symmetrical exchange has immensely reduced the cost for all buyers.    SN:20001JWLI

I believe the second reason term life insurance has experienced such a rapid increase in sales is due to the fact that many investors have seen a precipitous drop in their net worth.  Many individuals are concerned that they will not work long enough to rebuild their 401ks or IRA’s to the level they had once seen.  Thus, leaving the spouse incapable of maintaining the lifestyle in which they had become accustomed.

Whole life insurance has been used as a tool during the financial crisis as well.  Since the recession was brought on by a credit crisis, banks have been slow to loosen the reigns on lending.  This environment has driven many to look at alternative financing sources.  Because whole life insurance has highly attractive loan provisions, countless business owners have tapped their existing policies to carry them through the recession.  Unlike banks, life insurance companies will not require a credit check, nor will the loan be subject to approval by a committee.  The policy owner simply requests the policy loan paperwork and the available portion of the contract cash value will be lent out.  Keep in mind, during the period of the loan, the policy death benefit will be reduced by the amount of the loan, however, upon repayment all benefits will be restored.

One final thought, recent years have tested the American financial system like no other period since the great depression.  When purchasing any type of life insurance, it is imperative to review the solvency of the company.  This is a relatively easy task since several rating services have done the heavy lifting for the consumer.  A.M. Best, Standard and Poors, Moody’s and Fitch ratings have all created different testing methods to determine the financial health of an insurance company.  By looking at the ratings from these services, the consumer will get a clear picture of the company’s financial outlook.