Why Is Life Insurance Becoming Cheaper?

Why is life insurance becoming cheaper? 

Life insurance is seeing the lowest rates in a long time. In fact, life insurance rates are at the lowest level that they have ever been over the past 2 decades. 

This is a superb opportunity for you to give your family the gift of financial safety that it so truly deserves. There has never been a better time to give your beloved relatives the financial protection that you owe them. 

As a responsible head of the family, you know perfectly well that your family will be devastated in the case of your demise. It is never pleasant to think about it. But bad things happen. That is the sad fact of life. You could pass away young. 

And what will become of your family then?

How will they pay for necessities without you? 

Will your kids ever go to college? 

Who will pay the mortgage? Where will they go after the house is foreclosed? 

How will your wife be able to manage on her own? 

Will working long hours on a hard job and caring for kids break down her health? 

These are hard realities that you have to think over. 

You surely know better by now than to go without life insurance. Your family can trust you to give them the financial protection that they need. 

Thankfully, life insurance rates have dropped steadily over 2 decades. Life insurance should not cost you an arm and a leg. Due to cheaper rates, life insurance should not break down your finances. 

But why are life insurance rates dropping? 

To understand the answer to this question, you will have to know about the factors that affect life insurance. 

Here are the key factors that influence life insurance rates. 

• Your age
• Your health status
• Kind of policy you intend to buy
• The average mortality rate in your area
• Financial strength and earning power of your insurer
• Business expenses for life insurance carriers.

To give you profound insights, here is a detailed breakdown of how each of the aforementioned factors affects life insurance rates. 

Average Mortality Rate

Probably the biggest expense for insurers is paying death benefits. The mortality rate determines how much death benefits the company will have to pay in a year. 

Hence mortality rate is the prime factor that determines insurance rates.

Higher mortality rates mean higher payouts each year for the company. To keep financially stable, the insurer will recover this high cost from customers by offering higher rates. Thus, higher mortality rate means higher life insurance costs.

Since a lower mortality rate means paying less death benefits each year, expenses will be lower and the financial standing of the insurer will be better. The company will be able to offer lower and more competitive life insurance rates to customers.

 

Individual Mortality Risk

When you apply for a life policy, the company will assess your mortality risk. This is no doubt morbid, but it is imperative both for you and the company. 

If your risk is higher, the company will have to charge higher rates to compensate. But if your risk is lower, the company can offer you a lower rate.

The company will try to predict your life expectancy based on relevant lifestyle factors and choices. Thus, the company could take personal data, request your income level, location, health habits (like smoking), age and other key factors that strongly influence life expectancy. 

The life insurance company will have a mortality table that specifies rates for the aforementioned risk factors. These rates are meant to be feasible for the insurer and reasonable for customers.

 

Business Expenses

As mentioned above the key business expense is paying out death benefits. So if the overall mortality rate is high, and the insurer is paying huge amounts in death benefits each year, then it will raise your rates.

But there are other business expenses as well like overheads and payroll. Insurance companies make investments to earn revenue. The company will invest your premiums into interest yielding accounts to earn money. With high interest rates, the company can afford to quote lower rates since earnings are good and financial stability is reassuring. 

But if the company is earning low interest rates, then its earnings will drop and this will hamper earning potential as well as financial stability. Consequently, the company will charge higher rates to compensate. 

 

Changes in Regulations

Regulations for life insurance companies also have a strong effect on the insurance rates. This is mainly due to rules pertaining to the reserve ratio. 

This ratio determines the money in reserve. This is the amount from which insurers pay out death benefits as they become due. Current regulations now allow companies to keep lower reserves. 

You might think that this is risky. After all, lower reserves mean that the company may not be able to pay death benefits. 

However, this is not the case. Past regulations called for high reserves which were superfluous and unnecessary. This represents waste and lost earnings since a lot of cash is just sitting idle. This cash cannot be invested and is thus unable to generate interest.  

Lower reserves actually improve earnings and financial strength since the company can now invest more money for earning interest instead of forcing it to sit idle. Higher revenue and financial stability mean greater security for customers. The company will likely be operational in the foreseeable future and will have a stronger ability to pay out death benefits due to great financial strength.

Over the years, insurance companies have maintained records and performed analysis on how much reserves are actually necessary. It showed that reserves were higher than necessary. 

As a result, regulations eventually caught up and allowed insurance carriers to maintain lower optimal reserves.

 

Lifespan Increases

Life expectancy in the US has steadily grown over the years. Although expected lifespan increase has currently stalled, the current life expectancy is still substantially higher than what it used to be a few decades back. 

Part of this is due to medical advancements, better drugs, procedures and medical care which has resulted in lower mortality rates. As a result, US citizens are living longer on average. 

In view of these developments, life insurance companies can now afford to offer lower rates on their life plans. 

Since life expectancy is high, the mortality risk is low. Annual death benefit payouts are thus lower. With lower costs, insurance companies are thus earning higher profits and can afford to lower their rates. 

Life insurance companies also have a much better ability to accurately predict lifespan of customers thanks to artificial intelligence and machine learning. Advancements in Big Data have allowed accurate predictions which has lowered uncertainty. 

These algorithms can automate the task of calculating mortality risk of customers and predict with greater accuracy. Hence, customers with a lower risk can enjoy lower rates. 

 

Better Technology

The underwriting process is now highly streamlined and automated thanks to technological advancements.  Before, it took many hours to process your claim, check your data, assess it, determine your rates and so on. But with the development of 

Besides the underwriting process, claims approval is now increasingly automated. As a result of streamlined processes, higher efficiency and lower ensuing costs, companies are able to offer lower rates to customers.

This was an explanation on how various factors determine insurance rates. You might think that these factors are beyond your factor and therefore there is nothing you can do to lower your rates.

As a matter of fact, there is something that you can do. Here is what you should do to lower your insurance rates.

 

Determining the Optimal Insurance Product for Your Needs

There are various classes of insurance products on the market with great variations in price. There is a chance that you could end up buying a high cost insurance plan that is not optimal for you.

To avoid this situation, you should consult with your financial expert and independent insurance agent. You should take the input from both of these professionals to ascertain what insurance product will suit you best. 

The best insurance plan for your family depends on factors like income and where your family is expected to stand financially in the coming decades. Your family’s future financial standing depends a lot on your current debts, current costs, education and so on. 

You will have to factor in major life decisions like home purchase, car purchase, kids college, paying off current debts and other crucial issues that will suffer a setback in the case of your unfortunate demise. 

This is most certainly a morbid thought. But you have to think what will happen to your family if the mortgage cannot be paid and the house is foreclosed. Where will they live? Your kids may not go to college if you die young. 

A lot could go bad if you pass away early. Hence it is necessary to get down with your financial advisor and insurance agent to discuss the possibilities based on your current circumstances.

What insurance product is best for you also  depends on your current and projected future income level. 

Based on your circumstances, your finance professional and independent insurance agent will be able to suggest the optimal insurance plan.

 

Early Purchase

The earlier you purchase life insurance, the better. For life insurance is most relevant early on. When you are a young adult, have a young family and are the sole breadwinner for your dependents, you have the greatest need for life insurance. For if you pass away, your dependents may suffer critical financial problems since you are no more there for them to earn money. In case of such an unfortunate mishap, your insurance policy will pay out massive death benefits that can stabilize the financial condition of your economically susceptible family. 

Early life insurance purchase makes sense because your dependents are the most economically vulnerable at this stage. Your death will lead to immense misery and suffering for your dependents. But death benefits can keep your family financially safe and stable.

Another major benefit of buying life insurance early in life is that it will be cheaper. In fact, one of the best things that you can do for paying less on life insurance is to buy it as early as possible. 

Have you still not bought your life insurance policy? The best time to do that was in the past. The next best time to buy your life plan is now. So make sure that you buy life insurance now since it is only going to become more expensive later on. The more you delay purchasing the life plan, the more expensive it will become.

 

Health and Wellbeing

Your health and wellbeing have a major effect on your individual mortality risk which as you have learned is a major factor influencing life insurance rates.

Thus, you should strive to get as healthy as possible. If you have preexisting health problems like diabetes, heart disease, high blood pressure or some other chronic condition, then your insurer will most certainly charge you a higher rate. That is because your chances of dying rise with chronic illness.

Make sure that you are not overweight. If you smoke then quit it now. 

Your health status, age, chronic diseases (if any), weight and smoking habit (or lack thereof) can strongly influence life insurance rates. 

So take charge of your health now for lower rates. You may also live longer and be there for your family when they need you the most. 

 

Bottom Line

Why is life insurance becoming cheaper? Hopefully, you now have a good idea. Make sure that you take advice from experts, improve your health and buy insurance early to get lower rates.