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- According to data from S&P Global, the life insurance industry lost a total of $50 billion in the first quarter of 2020.
- A big share of life insurance companies’ revenue comes from annuities, or insurance contracts which provide retirement income after purchase.
- Since this money is invested, it’s especially vulnerable to market fluctuations.
- The least affected product from these losses will be term life insurance, a product that’s more insulated from the market.
- Prices could increase marginally, but term life insurance will still be the most affordable way to cover your family.
- Policygenius can help you compare life insurance policies to find the right coverage for you, at the right price »
According to new data from S&P Global, the US life insurance industry saw big drops recently — in the first quarter of 2020 alone, the industry lost more than $50 billion.
But the industry losses shouldn’t affect every type life insurance equally, says Steven Weisbart, a senior economist with the Insurance Information Institute. Because each product is so different, life insurance options like annuities and universal life plans will be more affected than options like term life insurance.
Options trading Insurers make money in the markets, so annuities and permanent life policies are most affected
Life insurance companies make their money in the stock market. While big losses aren’t necessarily common in this industry, a market drop as big as what happened in March can’t help but make a significant impact.
“Although we traditionally call it the life insurance industry, 50% or a little more of the life insurance industry’s revenues and profits come from the sale and maintenance of annuities,” Weisbart tells Business Insider. “And the annuity business is mainly a money management business.”
Annuities are insurance policies bought that provide retirement income to people over age 59 and a half. Bought either with a lump sum or a series of payments, these contracts pay out monthly, either immediately or in the future.
Insurers generally take the money earned through the sale of annuities and invest it. The returns eventually pay annuity holders back in the form of monthly payments. Like a 401(k), the life insurance companies’ investment accounts also fall when markets drop, but could go back up when the assets’ values rise again.
“Insurance companies levy a money management fee on the assets,” Weisbart says. “When the value of the assets drop, investment management fees drop. In March, the market dropped precipitously, really far and really fast. And so, some investment management income insurance companies had hoped to receive did not appear.”
Stock market drops can affect the amount that insurance companies make on their money, and not just in the annuity market. “The same kind of money management also applies to whole life insurance, universal life insurance, and variable life insurance,” Weisbart says. Similar to annuities, whole, universal, and variable life insurance have a cash-value component, where premiums you pay are invested and can be paid out in cash.
Most of the major losses in that $50 billion component had to do with the annuities and other invested life insurance products. That’s not to say that people who have annuities will see their incomes decrease or stop — insurance companies have large cash buffers that can help them get through times like these, Weisbart says.
But, anyone looking for whole life insurance, annuities, or other invested life products might find them more expensive in the future. “The insurance company’s own expenses will rise if they haven’t already,” Weisbart says. “The premiums they have to charge either for life insurance or for an annuity will probably go up a little bit.”
Options trading Term life policies aren’t subjected to as much of this risk, and they shouldn’t get any more expensive
Term life insurance policies aren’t very affected by the markets — if you die before your policy expires, the death benefit is paid out exactly as listed on your policy as long as you’ve paid your premiums, no matter what’s happened in the stock market.
They’re also much more affordable than the typical whole or universal life policy, which is generally between five to nine times more expensive than term.
Term life insurance itself is more insulated from the ups and downs of the market, and likely won’t have any big jumps in prices. Over the past few years, there’s been a downward trajectory in prices, anyway, Weisbart says. “Insurance has generally been coming down because people are living longer.”
Overall, term life insurance policies haven’t seen much change throughout the COVID-19 pandemic, with the biggest changes being to underwriting standards and requirements rather than pricing. “If you need life insurance, go buy it.” Weisbart says. “The price may be a teeny bit higher, but I wouldn’t worry about that.”
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