Let’s take a closer look at the impact of interest rates on life insurance, and why 2017 could be a good year to buy a policy.
The Impact of Interest Rates on Insurance
When you buy a life insurance policy, your premium payments are figured using a variety of assumptions. One of those assumptions is what interest rates will look like over the course of your policy. If rates run higher than anticipated, that will generally benefit your policy’s cash value. If rates run lower, that can pose some challenges for the insurance company, and subsequently, the policyholder.
Over the past several years, the Federal Reserve has maintained an ongoing policy of rock-bottom interest rates in an effort to boost economic growth. This has been particularly tough on insurance companies who may, in some cases, require additional premium payments to keep policy benefits and features in place.
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Insurers are at the mercy of interest rates because much of their profitability relies on an ability to earn a spread over collected premiums. When long-term bonds are averaging 2-3%, it is quite possible that insurers trying to meet their contract crediting obligations will pay out more than they earn from investing policyholder premiums. If this happens year after year, insurers may have little choice but to raise policy costs if they are to continue servicing existing policies and issuing new ones.
The Tide Is Turning
Near the end of last year, we finally started to see interest rates move up with some real enthusiasm. Part of that has to do with the election of President Trump. There is an expectation that widespread tax cuts coupled with major spending initiatives may cause significant inflation over the next few years.
The Federal Reserve also recently raised the federal funds rate 0.25% and indicated a likelihood of three more rate hikes during 2017. With interest rates expected to continue on an upward trend for the next several years, insurance companies can finally breathe a little easier knowing they can generate some better returns on the premiums they collect.
Rising rates should also be reassuring for policyholders, particularly for those who own or are considering the purchase of a universal life policy. For example, more rapid accumulation of cash value can lead to lower premiums payments in the future. Or, it can be used to create a supplemental income stream during retirement. It could also mean lower initial premiums for those looking to buy a new policy.
The prospect of rising interest rates takes an already-attractive investment alternative and makes it an even more compelling. Not only does life insurance offer a guaranteed return, but the proceeds are generally free from income and estate tax. With rates on the rise, those of us who primarily own stocks and bonds may want to seriously consider where life insurance sits within our overall asset allocations. Rising rates generally lead to lower bond prices and an increase in stock market volatility. Life insurance policies sidestep all of that uncertainty.
The advisors at Howard Kaye have been creating estate plans anchored in life insurance for decades. We have devised many of the strategies commonly used by life insurance professionals today. Contact us to learn more about how your current policy may be impacted by rising interest rates, or to learn about how a new policy can tackle your estate planning needs and increase the transfer of wealth to future generations. Call us today at 800-DIE-RICH.
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