Wealth Advisor Resources

What Low Interest Rates Mean For Life Insurance

Michael Brohawn CFP®, CLU®, CAP®
Your Life Insurance Solutions

Nov 13, 2020

An article in the Financial Times announced, “profoundly low interest rates are here to stay,” which should cause investors to “recalibrate” assumptions with their investments. (1)

On July 31st the Federal Reserve lowered interest rates for the first time since the financial crisis, a 25-basis point drop. Now some are calling for more cuts to keep the economy on track.  These low rates are an historic aberration – but some are calling them the new normal.

Overseas, the rates are even lower. The European Central Bank rate is minus 0.4% and since the European economy is faltering, more rates cuts are possible. (2) Rates in Japan are also negative, as are rates in Denmark, Sweden and Switzerland.

Who are affected by these low rates? Borrowers are affected positively; fixed investors negatively. Who are some of the biggest fixed investors? Insurance companies who are required to invest the bulk of their general account in fixed instruments.

Larry Fink, CEO of BlackRock, whose firm is the largest investor in life insurance companies in the world, said the “persistent low rates” were “destroying the viability of insurance companies.” He made this comment over 4 years ago. Since then rates ticked up a bit but stalled and now momentum seems to be moving in the other direction.

Life insurance companies take your premium, invest it, primarily in fixed investments, and then return the money in the form of death benefit or cash value; and hopefully make a profit. The only type of life insurance not directly affected by low rates is variable life insurance where you, as policy owner, have the responsibility to invest the cash value in separate accounts. Even equity index policies are negatively affected when low rates leave less money to purchase option hedges, lowering potential positive returns.

How long can your carrier go in this historic low interest rate environment without raising your policy costs? Some have already started as the rash of cost of insurance (COI) increases in the last few years have shown. If they cannot make money on investments, raising your cost is an easy way to increase their bottom line. And the court cases that have come out of these increases have shown that even when the carrier “loses” so do consumers, with carriers giving back just a fraction of the increase and sometimes allowed to continue charging the higher rates.

The low rates have wreaked havoc on policy performance, with policies projected to run to maturity under higher assumed returns, lapsing well before maturity, some before life expectancy.

If you have a life insurance policy or are tasked as a fiduciary to manage a policy, it is a good time to understand what costs are guaranteed and what are not. A policy review is certainly in order if you have not reviewed the policy in the last few years.

Policy issues rarely get better over time, they typically get worse. Reviewing your policy now might provide you with options you may not have in a few more years.

1. Profoundly Low Rates Are Here To Stay, Robin Harding, Financial Times, 7/31/2019
2. The Undeclared Currency War: How the ECB Is Forcing the Fed’s Hand, Greg Ip, Wall Street Journal, July 31, 2019
3. Low interest rate “destroying” insurance companies: BlackRock, Insurance Journal, April 21, 2015

Free Book For Wealth Advisors

Michael put the knowledge gained from working with Fiduciaries and Wealth Advisors on thousands of life insurance policies into his first book, The Wealth Advisors Guide to Life Insurance.

An easy to read book, it provides Wealth Advisors with a background in life insurance and outlines the process for the proper selection, use, and management of life insurance.

If you are a Trustee, Attorney, CPA, Family Office or Fee-Based Advisor, Michael is offering you a free copy of the book for a limited time.

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