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How Is Covid-19 Affecting Life Insurance Companies?
Covid-19 has been part of the landscape for nearly a year and a half now. Many people are wondering about how it affects the life insurance industry.
Are the insurers facing solvency problems?
There is a small adverse bump in mortality experience, but not enough to raise concerns about solvency among the big ones. It barely reduces earnings.
How can that be true?
There are two obvious reasons.
- The vast majority of deaths are among people in their seventies or older. I have access to statistics for Ontario. They help understand this point. So far there have been 8,655 deaths. Of those, 83% are people 70 and over.
A significant share of those would have died in fewer than 10 years even if Covid-19 had not appeared. Insurers can tolerate small reductions in average life expectancy. - Older people have much less insurance than do younger people. Few people in their 80s and 90s have coverage of more than $25,000. Many have none. Even though there are more than the usual number of deaths, the dollar cost is not huge.
Will premiums rise?
Maybe in the near term, but there are other factors too. Suppose interest rates go up. Interest affects their reserves much more than mortality does. Rates are as low as they have ever been. Insurers own vast inventories of bonds and mortgages. If rates rise it will tend to make premiums go down, not up.
When the pandemic came along, some people added to their portfolio because they noticed they might be vulnerable. That spreads the risk of death over a larger base and thus reduces the risk related to any individual. That’s good for insurers.
What should you do?
If you own participating insurance where mortality is a factor year to year, the dividend scale has not changed. It could, but the other factors will work in your favour. No need to address existing coverages on the basis of a pandemic.
Take stock of what life insurance can do for you. Malcolm Forbes opined that life insurance is an efficient way to transfer money to your heirs.
The life insurance advantages:
- Life insurance provides instant liquidity to address estate obligation without disturbing other assets. There may not be a good market for your business, your real estate, or your stock and bond market holdings. Your lenders and newly found creditors like the government want cash and soon.
- Life insurance is tax efficient. By refocusing your investment assets you will see a significant boost in the liquid part of your estate.
- Life insurance is easier to understand and manage than most other assets. If you estimate that in your family, one of you will die before the other, is it helpful to have the management load shrink at the first death? Many people see that as value. You can use design advantages like second-to-die coverage to efficiently deal with the estate liquidity problem.
- Life insurance can bypass probate. Not a huge saving, but efficiency says deal with the easy options.
- Life insurance often frees room for other estate planning options. If liquidity is not an issue, you can invest other assets differently. It is not about what life insurance does, it is about what it allows you to do if you own it.
Use the impetus of a pandemic to assess the real gains you can have by planning your life insurance portfolio more effectively.
I help people have more retirement income and larger, more liquid estates.
Call in Canada 705-927-4770, or email don@moneyfyi.com
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