Financial Issues of Cheap Life Insurance Policy Holders

Nobody feels sorry for life insurers. People who make you think about death, take away your checks and make you work hard as you file for claims. Maybe it’s time to give them a break as it is a trying time for the insurance industry. As gloomy company representatives sit together at an annual meeting of the American Council of Life Insurers, they struggle to come up with solutions to continue to issue a cheap life insurance policy.

Low rates of interest mean that insurance companies are unable to make easy money let alone profit from a cheap life insurance policy they are selling. Uninformed and bad pricing decisions may mean they can even lose money in some annuity and long term care plans that were sold a year ago. Several providers have decided to leave the market or are trying to come up with complex new products to fit the market. They are also worried about the effect that upcoming tax reforms will have on the market.

What does all this mean? It is going to cost more. Here is a look how your wallet will be hit by these industry challenges and what can be done about it.

–  Low Interest Rates are here to stay for a while. It is one of the biggest challenges faced by insurance industry. When a provider sell its products, it basically purchase bonds to make sure it is able to provide the return it promised. But with less than 2% annual return from Treasuries, it is difficult to guarantee income over a long period.

–  Its affects on the end consumer: People who are planning to lock up their money in cheap life insurance or long term retirement incomes, must bear in mind that they are doing that at the bottom of a market, in respect to yield. Don’t invest all the money which you have set aside for annuities all at once. Purchase some of it now and keep the rest for a later period. It is quite possible yields will improve in a year or two.

–  Mistakes made in the field of Long term care. Companies who did not make a thorough analysis and jumped in straight away, didn’t really understand just how expensive and pervasive long term care can be. They are now incapable to foot the bill for the baby boomer generation who are chronically ill. Numerous policies were issued by several insurers.

Certain companies raise premiums aggressively on existing policies. Take a look at this: Retirement system for California Public Employees raised the premium for cheap life insurance policy by 75%. It is nothing out of the ordinary to see rise in premium by 20% or more.

–  Its Effect on Consumers: There are people who genuinely need long term care insurance, but they still do not enroll in one just because the prices are too high. People who are convinced they still need this coverage search for plans that have limited payouts of 3-5 years. This is provided by insurers that have sizable business in long term care and top rating, and it does not affect budgets even if premiums rise by fifty percent.

–   Old but Generous Variable Annuities. It’s ironic that these plans have a poor reputation as consumers are ripped off due to high fees. They have a basic structure, which enables investors to put money in the stock market and still have considerable returns.This is turning out to be costly for insurance providers. Certain firms are even trying to purchase back old annuities from policy holders by offering lump sum payments.

–    Enrolled Policy. People, who are enrolled in a cheap life insurance policy, or variable annuity, should be surprised if they receive a lump sum offer. Take the case to a genuine and neutral financial advisor who understands the complicacy of insurance, financial markets and life expectancy. Together you can arrive at a better decision, based on your health, life expectancy, where you can invest that lump sum and several other related issues.

–   Disappearance of Tax Breaks. The annuities and cheap life insurance policies are built on tax breaks which accrue for the policyholders. Money earned in insurance plan is basically tax-free or tax-deferred, depending on the structure of the product and how the benefits are accessed. These breaks may be limited for big plans or policies that have high yield. Provided enough loop holes are blocked, top tax rates can conceivably drop and it is not good for the insurance industry.

Those who are in the upper limits of the tax bracket should not make their insurance decision just on the tax savings a plan provides. Purchase a plan that actually makes sense. Get in touch with an insurance advisor if you are in that elite list of tax payers.