It’s never a bad time to buy life insurance. Even if you buy when you’re young and have no debt or dependents, you’re at least locking in rates for when you get older.
That being said, there hasn't been a better time to shop for life insurance in at least 20 years. Life insurance rates have never been lower. Why? People live longer, and companies are getting better at handling it. Insurers are being smarter financially and technology is letting life insurance companies, especially startups, operate at lower costs.
How are life insurance costs determined?
To understand why life insurance costs are so low, it’s important to understand how insurance companies calculate those costs. This is a slight simplification, but it essentially comes down to three things:
- Mortality rates of customers Insurers use a mortality, or actuarial, table to show life expectancy and get an idea of how much in claims they would theoretically need to pay out.
- Interest from premiums Like any company, an insurance company needs to make more money than it spends. To that end, they invest premium payments so that cash grows. You can learn more about what life insurers do with your premiums here.
- Expenses Insurance companies have overhead costs like building leases, employee salaries and benefits, and more. If these are high, policy prices will likely be higher, too.
Improvements in each of these areas mean companies can pass savings onto policyholders.
1. Changes in mortality
Life insurance is pretty basic: You pay for it, and if you die, the company pays out a benefit. Thanks to technology, it turns out there’s a lot of nuisance to the “pay & die” formula.
Related to mortality tables are health classifications — essentially how companies rate you based on your health and health history. Underwriting classifications were expanded 20 to 30 years ago and let insurers be more granular — and accurate — in how they set premiums.
People are living longer, which means they’re outliving their policies. That means companies don’t have to pay out as much in terms of benefits and they can afford to lower costs.
There have also been medical improvements that make conditions like diabetes, AIDS and cancer more manageable. In the past insurers may have completely turned these people away or charged high prices to cover them. Now, coverage is more affordable.
Getting smarter about mortality improvements
Just because people are living longer doesn’t mean that life insurance companies are acting on that revelation. Except, well, now they are.
As noted in the Report of the Society of Actuaries Mortality Improvement Survey Subcommittee (a real thing), mortality improvement comes in two forms. We can look at long historical periods and apply learnings to the present, and we can project current mortality models into the future, taking into account predicted trends and expectations. Combined with analytics from things like wearables, actuaries are able to price current and future policies accurately.
2. Changes in investments
As mentioned, insurance companies don’t just let your premium payments sit idly while you have a policy. They invest that money and put it to work. That makes sense. If you pay $100 a month for a 20-year term life insurance policy, you’re only paying around $24,000 — hard for the insurer to make ends meet on a $250,000 or $500,000 policy. Luckily for customers, companies are getting better at how policy money on the back end is being handled.
You need to diversify your investments, and so do insurance companies. And low interest rates have forced them to do so. Insurers are looking beyond their classic portfolios of bonds for more innovative — and higher-returning — investment opportunities. These include things like infrastructure and real estate. The more money carriers can make through investment, the less they have to make by charging customers.
Changes in reserve ratios
A reserve ratio is how much money a company has to have on hand to cover policyholder obligations. As you can imagine, when you consider all of the customers any given company can have, that adds up quickly.
However, a few months ago, state regulators changed how much money companies actually had to have. This let companies be more flexible with their reserve ratios and more accurately reflect the money they’d need. Reserve ratio changes are one of the reasons it was expected that term life insurance costs would drop in 2017.
3. Changes in expenses
Insurance companies can be smarter about what they’re charging customers, they can be smarter about the money they have on hand and they can also be smarter about how they’re spending their money.
Like in many other industries, technology has provided an all-around efficiency boost to insurance companies. Better, faster underwriting through accelerated underwriting and fraudulent claims protection with blockchains lower manpower costs (and allow people to get covered and file claims more quickly).
Combine that with online platforms from newer companies — like, say, Policygenius — and robo-advisor platforms that drastically lower overhead costs, and it’s easier for companies to keep the lights on without charging high prices for policies.
At the end of the day, you should buy life insurance when you need it — like when you’re planning on buying a house or starting a family. But it doesn’t hurt when prices are as low as they’ve been in decades. Now you don’t have any excuse to start shopping today.