The markets are crashing. Banks are reducing lending. Life Insurance underwriting is wobbling. How Safe are Life Insurers in the time of the Coronavirus Pandemic?
The future of the life insurance industry might be at a crossroads while a new pandemic hits the world. The financial dividends paid out by very stable mutual life insurers might recede. The combination of a pandemic and a low interest environment could be a sickening toxin.
Any well written article on this subject should first point out the non obvious, depending on the state that you live in the United States, likely there is some level of protection for life insurance policies should the insurer go into receivership, assuming the policy is written with an admitted insurer. However each state is different and there are limits. Some states cover a percentage up to a specific amount. See your state regulator or State Guarantee Association for more information concerning this.
Receivership or Dissolution of Life Insurers aside, the real question is one of dividends. Many insureds purchase permanent contracts with the idea that they can be used as some form of an investment. [Although whether life insurance policies are true investments or not are a greatly disputed concept.] Some Mutual insurers offer participating life insurance contracts that can pay out whole life insurance dividends. Therefore the question today is Will my whole life contract return solid dividends moving forward? Will the insurer and contract be able to perform well in the age of the coronavirus pandemic?
“Will my whole life contract return solid dividends moving forward during the time of Coronavirus?”
For the record and before we start our discussion, let me emphatically state that this blog: WholeVsTermLifeInsurance has rarely found that participating whole life insurance policies are a good investment for the vast majority of the population when compared with qualified investments such as 401Ks, Roth IRAs, and other non qualified investments such as HSAs, Municipal Bonds, etc. However given the recent market downturn and given the fact that we have stated on numerous occasions that in certain periods of turbulent times its more likely that a Whole Life Contract could beat out a Stock Portfolio, this article seems timely. I stand by that analysis. However the recent pandemic will more than likely “probably” not be one of these times. In other words it might be unlikely that putting your money into whole life insurance policies as a storage of wealth makes sense right now,
There are three main issues that will haunt and frustrate life insurers for years to come:
Underwriting For Coronavirus?
Insurance companies need new customers as old customers terminate their policies. Either from death or abandonment/ cancellation. Property and Casualty insurers are in the same boat. Some customer leave and new ones are brought on. The problem is similar for home insurers right now. How does a home get inspected currently when a new home insurer takes over? Many life insurance policies require a paramedical exam. This exam is done by a competent medical technician and may involve numerous blood tests and body measurements. But how is this to be done in the current lock down environment? Life Insurers are still grappling with this as of the writing of this article.
In addition, since the coronarvirus is so new, many of the medical data points that would normally be known about a given disease are unknown. What we do know is that this disease is killing large amounts of people. However the quantity of people dying is not agreed upon. The rate of infection is not known or agreed upon as well. There is even a debate within the medical community if having once had the disease protects you from getting it a second time.
In short its not possible to underwrite for coronavirus effectively currently. So… what are insurers to do with new people that want Life Insurance contracts? How do they safely (and profitably) bring them in? Do they keep bringing consumers on in the typical method? Do they stop issuing all policy contracts? Do they issue new underwriting guidelines? As of the writing date of this blog post, it is very uncertain.
Mortality of Existing Life Insurance Customers:
This is a very sad subject. Discussion of mortality as it relates to an investment even more so. Nonetheless it is part of the equation. Does COVID19 kill 1%, 2%, 3%, 4%, or more of people that are infected? Or is it merely .1%? At the time of this writing its frankly unknown due to the lack of testing and probably because the healthcare system is so taxed and overwhelmed. What we know with certainty is that at least 66,000 Americans have died from coronavirus as of May 2nd, probably many more. Most of these mortalities were not expected when policies were implemented. This could be considered to be a new mortality factor.
It is much easier for an insurer to fund a death benefit after the client has paid out for a longer period of time, this is obvious. What is less obvious is that many more death benefits that were Not expected to pay out at all will be forced to. Life insurers offer numerous types of products. One of the most common is Term Life Insurance. Term life is terrific because it is underwritten typically for a limited amount of time, the term. It is typically not a forever policy. The policy pays out exceptionally rarely. My expectation is that there will be very large surge of Term Life (and Permanent Life) death benefit payouts.
Low Rates of Investment Returns:
I realize that numerous insurance agents sell and push life insurance as a non stock investment. However this is mostly incorrect. Life Insurers need to invest their customer’s premiums in order to generate returns. Life insurers are known for being fairly conservative with investments though. Their investment mix spans bonds, common stock, real estate, mortgages, and even derivatives. A National Association of Insurance Commissioners study from 2010 showed that about 69.7 percent of insurers assets were in Bonds and 10.3% in common stock. This was for all insurers. For life insurers the asset mix is different.
Life Insurance Asset Mix for 2010 from the NAIC:
Corporate Bonds: 36.1%
US Government Bonds: 35.1%
Structured Securities: 17.0%
Common and Preferred Stock: 2.9%
Commercial Mortgage Loans: 2.2%
*Not all asset class are listed from the report. We have attempted to keep it simple.
Therefore we can see that over 70% of assets held for investment within life insurers are various bonds: US federal government, municipal, corporate, and even foreign government bonds. In general bonds are considered safer than stocks because it is much more difficult for the insurer to lose their investment on a Corporate Bond than a Common Stock Shares. That being said, its not entirely impossible.
The larger issue for insurers investing in bonds moving forward is the rate of return. How much return can life insurers get on their new investments? In large part the rate of return paid out is determined by the US federal government. One indicator of this is ten year treasury bond. According to MacroTrends: “The 10 year treasury is the benchmark used to decide mortgage rates across the U.S. and is the most liquid and widely traded bond in the world. The current 10 year treasury yield as of April 24, 2020 is 0.60%.” That low rate, and it is very low, is the lowest it has been since at least the 1960s. During the financial crises of 2008/2009 the 10 year traded at a low of about 2.16%. That is a notable time because that was also a past financial crisis which was difficult for insurers to endure.
According to the St Louis Federal Reserve the seasoned Aaa Corporate Bond yield currently is around 3.02%. However this is likely to change soon. Aaa bond yields have not been that low since the 1950s. The low was about 2.55% in 1947, just after the end of World War 2. This clearly means that we are approaching the lowest return on corporate bonds in modern history. Perhaps corporate bond rates will increase due to the coronavirus, no one knows yet. However it does not seem likely that one of the key drivers of rate (the Federal Reserve) will be raising rates anytime soon.
The Fate of Life Insurers with Coronavirus:
As of the writing of this article, I see nothing to indicate that life insurers are at fault of receivership by the various state regulators. However, I do agree with Moodys and other rating firms that the outlook is darkening. See this short article: Moodys Changes US Life Insurance Outlook to Negative. But I do not believe that now is the optimal time to be purchasing a life insurance contract to grow your wealth. I rarely believe that to being with, but even more so now.
The headwinds against life insurers are profound and significant: (1) an unclear Underwriting Situation for new policies (2)an Increased Mortality Rate of Current Insureds and (3) a potentially Prolonged Low Rate Environment.
Please read our disclaimer.