With life expectancies going up, insurance premiums are coming down. Since 2000, term-insurance premiums have dropped by more than 4 percent a year, according to the Insurance Information Institute, an industry trade group. In fact, they are now 50 percent lower than they were a decade ago, says the group.
This year and next year, term insurance premiums are expected to decline by at least another 2 percent. Meanwhile, the cost per $1,000 of life insurance coverage for cash value insurance policies-such as whole life, universal life and variable universal life-is also on the decline. Premium rates for cash value insurance policies are lower today than they were five to 10 years ago.
Premiums are expected to decline even more in the coming years. "We foresee a continued downward trend in life insurance premiums, which began a little more than 10 years ago," says Steven Weisbart, an economist with the Insurance Information Institute. "It is fair to say that insurance rates are likely to come down because people are living longer, insurance companies benefit from the lower cost of reinsurance and insurers are reducing their expenses."
Overall, Weisbart said the premiums people pay for cash value insurance run about 5 percent lower today compared with 10 years ago. So the savings could prove quite attractive for large ticket policies of at least $500,000.
There are a couple of reasons for the drop in life insurance rates. One reason is that the mortality tables have changed. Effective January 2009, all insurance companies must use the Commissioners 2001 Standard Ordinary Mortality (CSO) table to calculate insurance rates, an update from the last table, which was created in the 1980s. But most insurance companies have already begun using the new table in preparation for the January deadline.
Under the new CSO, the average 65-year-old male is expected to live to age 81, up from 78 under the previous table. Meanwhile, a 65-year-old female is expected to live to age 85 today, compared with 81 under the old table. And death rates for 25- to 44-year-olds-the primary buyers of life insurance-have decreased more than 10 percent since 1994, according to the Insurance Information Institute. Basically, because most life insurance policyholders will live longer, they will pay annual premiums for longer on the same amount of coverage, so insurance companies can afford to charge less.
But there are also tax issues to consider. New universal life and variable universal life insurance policyholders may find themselves at a disadvantage under the new 2001 CSO table, says Ron Johnson, president of Metro Financial Inc., based in Denver. There is an upper limit on how much in premiums can be contributed to a universal or variable universal life insurance policy, based on the IRS' "7 pay tax test" rule.
If contributions exceed the allowable amounts, called "target premiums," based on this test, the IRS no longer considers the policy life insurance. It is considered a modified endowment contract. As a result, policy loans are considered taxable income. By contrast, life insurance policy loans are tax-free. As a result of paying lower premiums due to the 2001 CSO table, target premiums for universal life insurance have dropped.
The drop in insurance rates can represent a substantial savings for term insurance, which provides insurance coverage with no cash value. The annual premium for a 40-year-old male non-smoker buying a $500,000, 20-year level term life insurance policy would run $725 if he qualifies as a "standard" risk, and $350 if he meets the more stringent requirements of a "preferred" risk. Rates for women, younger people and for larger amounts of insurance are even lower.
On the cash value side (and depending on the insurance company, type of product, health and occupation of the individual) someone age 35 would pay about a $1,600 annual premium for $200,000 of cash value life insurance coverage. Ten years ago, the cost would have been about $2,400 for the same coverage.