One of the methods for determining an appropriate amount of life insurance to buy is called “needs analysis”, which entails computing the amount of money needed to support the current lifestyle and then buying an amount of life insurance that, when invested, will generate the needed amount.
But the needed amount should just be the starting point, because what about dreams? Shouldn’t they be insured also? Few people are satisfied with the status quo. Wanting to improve and grow, for one’s self and one’s family, is natural. It shouldn’t die just because the breadwinner dies. So adding a “dream” amount to the “needs” calculation can usually make sense, but now more than ever. Why?
For the first time in very long time, the cost of life insurance is likely to increase. Over the last half century or so, the cost of life insurance has steadily decreased as life expectancies have increased. It makes sense, right? If on average, people are living longer, then the premium charged by the life insurance companies can decrease, because they will collect the premiums for a longer period of time and the ultimate pay-out will be pushed further into the future.
Life expectancies are still increasing, albeit at a slower rate than in the past. So why would premiums go up in that situation? Well, mortality is only one of three factors that influence premiums. The other two are company expenses and return on investable assets.
It is that last factor that will cause premiums to rise. The historically low interest rate environment of the last decade has started to put pressure on companies to raise rates to maintain profitability as well as reserve requirements established by the regulators.
The rate on 30 year Treasury bonds was 2.29% as of last Friday, which is less than half of what it was 10 years ago and a little over a third of what it was 20 years ago. As a company’s existing bonds mature, the proceeds must be re-invested at lower rates, thus putting an upward pressure on premiums.
So while “now” has always been the best time to buy life insurance, it becomes even more important in light of the current economic circumstances. In the past, the only penalty for waiting was the age related increase. But now there exists an additional potential increase. The way to avoid both increases is to lock in the low rates of today.