Sign of the Times: Current Interest Rates Change Life Insurance Landscape
By Trevor Royston & Ronda Davis
Family Wealth Advisors
Universal Advisor, 2004 Issue No. 2


Most people believe that life insurance is relatively cut and dried — as long as you pay your premiums, the policy will always be in effect, and there’s no need to conduct a periodic review.

Unfortunately, it doesn’t always work that way. Although some policies afford that luxury, the majority don’t. To assure your coverage is up to date, it’s crucial to review coverage annually and conduct a comprehensive review at least once every three years.

Over the years, the insurance industry has moved toward policies that transfer the future risk to the policy owner. This risk can provide opportunity but may also create surprises. For example, a policy purchased in 1985, when interest rates were double digits, may have been intended to last until the insured reached 100 years old. Now, however, with interest rates as low as 4 percent, this same policy may expire when the insured is age 80. This is typically not the fault of the life insurance policy, but rather lack of communication since the policy was purchased regarding the impact of falling interest rates.

If you have a policy that’s been affected by falling interest rates, don’t worry. By addressing the situation now you can:

• Increase the premium to account for the reduced interest rate.

• Reduce the face amount so that the current premium will allow the policy to last.

• Keep the policy as is, but understand that, unless interest rates rise, the policy will expire prematurely.

• Look at a different policy whose terms and features may better fit your current situation.

Although interest rates are a compelling reason to review a policy, there are others. In many cases, term life insurance policies purchased more than five years ago may be obtained at a cheaper rate today. Term prices have continued to fall due to competition and improving life expectancy tables.

It’s important that policy owners conduct overviews annually and comprehensive reviews at least every three years. This will enable you to stay on top of the policy, its competitiveness, and changing market conditions. In addition, it will allow you to keep your life insurance costs as low as possible and increase the long-term effectiveness of the policies. However, if you’re going to make changes to existing contracts — remember — never cancel an existing policy until the new one goes into effect.