High interest rates can be a tricky business to navigate. They tend to correlate with higher costs, which no one enjoys. Additionally, high interest rates are associated with a lower demand for housing. Yet, what benefits can increased interest rates have for potential insurance buyers? The pros of high interest rates for potential insurance buyers can be summarized as follows.
First, it is helpful to know that whenever one seeks out an insurance policy, the rate structure will have premiums established for the policy owner at the time the policy is issued. This is true for life insurance, Long Term Care, disability insurance and annuities. After the policy owner has decided on the options best suited for them and gone through the underwriting process, policy premiums will be based on prevailing cost components at the time of issue. These cost components include actuarial rates, administrative costs, and even the current interest rate environment. Meaning that if a potential buyer of insurance takes out a policy at age 55, the premiums that they pay
will be based on the underlying policy costs and underwriting classification at that age. Additionally, the rates are most often designed to remain level for as long as the policy is in place. Even though the policy owner continues to age, and health issues likely increase, the premium rate structure is designed to stay the same with varying degrees of guarantees offered by the company. Now, what do higher interest rates have to do with this set of facts? When insurance companies receive indications that interest rates will continue to increase over the next couple of years, they are incentivized to drive down the premium prices on newly issued policies. Alternatively, they could provide
other improvements such as higher benefits or extended guarantees on the policies that they offer to make them more attractive to prospective buyers. If the interest rates move at a higher percentage than inflation, the insurance companies should be able to “sharpen the pencil” and offer lower premium costs and possibly improved benefits without incurring losses on their revenue. It turns out to be a win-win situation for both insured and insurer.
We are already beginning to see evidence of this phenomenon occurring as competitive insurance companies adjust to the rising interest rate data. Some recent announcements show that highly rated insurance carriers are offering lower premiums to prospective life insurance policy buyers. Others are providing better benefits such longer guarantees or higher interest rates on annuities. In the final analysis, it seems that higher interest rates can be a good sign for anyone looking to buy insurance.
Studies indicating that interest rates are rising ought to be a hopeful sign for anyone considering an insurance purchase to secure financial stability in uncertain times.
If you have questions or would like to know more about the benefits of a securing a policy from an independent insurance resource, the experts at Acru Insurance, LLC are here to help.
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