How Has The Combination Of COVID-19 And Low Interest Rates Changed How I Think About Life Insurance?

A variety of factors should be considered when purchasing life insurance, and never is that truer than in today’s economic and healthcare landscape. Hear from Brant Steck what the new normal for life insurance will be.

Transcript

Tim Maurer:
Tim Maurer back with another episode of Ask Buckingham, a new video podcast designed to bring clarity in the midst of confusion, by connecting your great personal finance questions with straightforward answers from industry thought leaders. Today’s question will be answered by Brant Steck, risk management consultant with First Element Insurance Partners and, Brant, how has the combination of COVID-19 and low interest rates changed how I should be thinking about life insurance?

Brant Steck:
Well, I think that the pandemic has us all thinking about everything a little bit differently. I could tell you-

Tim Maurer:
That’s for sure.

Brant Steck:
… when COVID-19 hit and everybody started heading home and it started feeling real, just as a husband and a father, I started looking at my own insurance and thinking, “Now this is becoming real, do I have the amount of coverage and the type of coverage and the beneficiary designations that I want?” And fortunately, I’m in the business so I felt good about it, but for a lot of people, the under-insured and number of uninsured Americans is very high. It always has been. And then you combine that with unemployment being so high and a lot of people having the only life insurance they have tied to their employers and potentially losing their jobs and their insurance coverage at the same time.

Brant Steck:
It’s a little bit of a concern for a lot of folks. I know most people want to make sure that their loved ones are protected. On a positive front, with COVID-19 has made things a little bit easier in a lot of ways in the life insurance business. So, a lot of insurance carriers have accelerated underwriting programs, which they’re usually designed for people that are 18 to 60 and generally healthy. And people who qualify for those programs don’t have to do an exam and don’t have to have their medical records pulled, which is really nice. Now, before the pandemic, the typical amount of death benefit a person could get, carrier by carrier was between $500,000 and a million, and now it’s expanded to $2.5 – $3 million. So, people can obtain a meaningful amount of coverage without having to jump through the traditional hoops of the life insurance process, which has been nice.

Tim Maurer:
Yeah. Well, you mentioned that most Americans are uninsured or underinsured, and my guess is that that falls across the whole spectrum of insurance, but maybe especially life insurance. Why is it you think people hesitate to go through the process of getting life insurance and put insurance in force? What keeps us from doing it?

Brant Steck:
That’s a good question. I think a lot of it has to do with, they don’t know how much, and we see that even from people who come in and are looking to purchase life insurance, they come up with a number and it’s $500,000 or a $1 million, well, where did that number come from? Nobody’s ever really provided them meaningful perspective on the amount of coverage that they should have, that’s number one. And number two, LIMRA, which is a Life Insurance Market Research Association put out a statistic that the average American overestimates the cost of life insurance by threefold. So, I think people think they don’t know where to go, they don’t know how much, and they think it’s just more expensive than it really is going to be.

Tim Maurer:
Yeah. Yeah. And I think that that perception may be driven, in part, by the fact that an awful lot of the insurance products that are out there, that are being recommended by an awful lot of insurance agents, are actually a lot more expensive, right? When you look at the permanent life insurance products that have all the bells and whistles, I’ve seen premiums that, in some cases are 10 to 20 times what the comparable term life insurance is. And let me be clear, that doesn’t mean they’re not appropriate for the right person, but for most people, term life insurance is going to get the job done, and indeed, I think for most people ends up being surprisingly inexpensive relative to what their expectations might have been. Would you agree?

Brant Steck:
Yeah, I would agree. I would say, any client should be leery of a silver bullet product, in other words, any discussion about life insurance, that starts with a product first before hitting goals and objectives, there should always be some skepticism there. The reality is, is it should start with the need. How much do you need and for how long? And truth be told, most people need term insurance. There is a clear beginning and an end to the amount of coverage that they need. I mean, myself as an example, I have two young children and my wife works part-time, so my family is heavily dependent upon my income until my kids are out of the house. So, there’s a big need for a temporary period of time and term insurance makes a lot of sense in those kinds of scenarios. Now, there are people that need permanent insurance. Those who are concerned about the federal estate tax, but relatively those are few and far between.

Tim Maurer:
Yeah. And those numbers have gotten even fewer and farther between over the course of some of the changes that have been made in the estate tax laws. We have, certainly estate inheritance taxes that still create a challenge and that can be a useful tool in that, but like you, I’m married with two kids, and what I really need, is if anything, heaven forbid were to happen to me, and still I hope I’ve got many years to go, that my family would get a big hunk of cash that could help take them forward into the future. In fact, Brant, I’ll let you know that I let my wife and children know what the present value of my future earnings are every year, just to make sure that life insurance doesn’t look too attractive. Now, let’s talk a little bit about interest rates and interest rates have been low, it seems like since, oh, about the year 2000 now, what impact do interest rates have on life insurance to begin with?

Brant Steck:
A lot. So, the low interest rate environment is putting an unprecedented amount of pressure on insurance carriers. To put it into perspective, looking back to 2008, there was a lot of concern from insurance carriers that the interest rates were low at that time. I think the ten-year treasury, I think at that point in time was about 4%, and the decision that a lot of insurance carriers made at that time was based upon the premise that 10 years or so down the road, they’d be in a much better position that would, for lack of a better description, bail them out.

Brant Steck:
Well, here we are 12 years down the road and the ten-year treasuries for the first time hit below 1%. And these insurance carriers are sitting on books of business from the ’80s and ’90s that were guaranteeing interest rates of 4%, 5%, and 6%. So, they’ve taken a major hit to their profits. So, what does that mean? That means that in force blocks of business, highly likely that interest rates are going to continue to go down, into as far as they can go and the internal cost are very likely going to go up.

Brant Steck:
I think a lot of people think about their permanent life insurance like the cash value’s icing on the cake. “If I pay my premium, I can get the benefit that was originally proposed to me.” And the reality is, is that the cash value is the lifeblood of the policy, without the cash value being what it was originally projected to be, the policy may not last their entire life. If the costs go up or the interest rates go down, more cash needs to go into those policies and insurance carriers do a notoriously horrible job of communicating that. So, it’s critical to make sure that permanent life insurance policies, in particular, are going to be reviewed to make sure they’re meeting original expectations.

Brant Steck:
Now, that’s on the in force side. On new products, the price is going up and we just had one of the major players change the pricing on their product, and in increased on average by 16%.

Tim Maurer:
Wow.

Brant Steck:
Now, on term insurance, it’s so low that most people wouldn’t notice or feel it, but people who have been procrastinating in fourth quarter or first quarter, on moving forward with a permanent insurance are now looking at the exact same plan and they’re like, “Whoa, that’s a pretty significant difference.” And it really is, it’s getting more expensive.

Tim Maurer:
All right. Well, how would you recommend we take these two factors, one, COVID-19 in some ways it’s actually made it easier to get life insurance than it was previously, but interest rates that were low and that are now lower may have increased the premiums a little bit. What are the practical applications for somebody who wants to know, “Hey, how much life insurance they need and then how they should get it?”

Brant Steck:
Well, how much you need is completed through a needs assessment, looking at income, amount of years until retirement, what your goals and objectives are. In other words, if something, God forbid, were to happen to you, would you want to pay for your kids’ school and what kind of school and would you want your spouse to be able to continue to work? Would you want your spouse to be able to work when they’re grieving? What kind of debt do you have? What do your assets look like? It shouldn’t be a, “Let’s take your income and multiply it times 10.” It should be a mathematical formula that helps a person arrive at, “How much coverage should I have?” Just like you’re looking at your homeowners insurance, they’re going to value your home and your possessions and look at what appropriate amount of coverage is.

Brant Steck:
It’s the same thing with arriving at a value of life insurance that’s appropriate. And then, it’s just a matter of looking at different durations of coverage. So, you typically want to match the term duration with the amount of years intended to work. If you’re 20 years from retirement, it doesn’t have to be all done in a 20-year term. You can maybe do a 20-year term laddering with a 15 and a 10-year term to break down the cost a little bit and make it more affordable, having coverage drop off as the need goes away.

Tim Maurer:
Sure. All right. Well, now recognizing that some of the complexity that you just described and a fuller needs analysis and the laddering of various terms could be part of the obstacle in front of some people as it relates to going out and getting something, would you be willing to be pinned down to a simple multiple and a simple term, that would be a good starting point for someone who might be hung up by those additional hurdles?

Brant Steck:
It’s a difficult question to answer because a lot of times rules of thumb are not right, and they’re not specific to an individual. I will say, from a financial underwriting standpoint, most insurance carriers will write a 20 to a 30 year old about 25 times income, is the maximum amount they’ll do. Doesn’t mean it’s the appropriate amount but it’s the maximum amount of coverage. And then as you get closer to retirement, the insurance carriers will take a lesser and lesser multiple, by the time the client’s in their 50s, they’re looking at a multiple of maybe five to 10 times.

Tim Maurer:
Sure. Okay. Well, let me make it very clear to folks then, because I knew it would be hard to twist Brant’s arm into giving us a simple multiple, I believe that you should do a complete needs analysis, so that you know how much life insurance you need. I believe that you should do that analysis to determine how long of a term you should get. But if that’s holding you up my recommendation for a simple rule of thumb, that doesn’t apply in all situations, is 15 times your income for a length of time that you anticipate between now and when you’ll be retired. Now, again, that’s not going to cover everybody. Why 15? Well, just because I’ve found in most cases, Brant, 10 is too little and 20 or 25 is too much, that’s all, it’s just a starting point, but it’s one that I hope you’ll follow up on, if in case you are underinsured, uninsured or think you might be.

Beacon Hill Private Wealth is an independent, fee-only, fiduciary investment advisor providing evidence-based wealth planning solutions that simplify our clients' financial lives. Founder Tom Geoghegan, CFP®, MBA is also a member of the National Association of Personal Financial Advisors (NAPFA).

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