Life Insurance Premiums Likely To Rise As Life Valuation Rates Decline

Due to the fact that market interest rates have been declining over a period of about five years now, the maximum valuation interest rate that can be used to calculate statutory reserves for policies of life insurance is probably going to decrease from the current rate of 4.5 percent for a long term life insurance contract to about 4 percent.

When this change finally does occur, carriers are going to have to use a 4 percent or lower rate of interest when calculating the statutory reserves for long-guaranteed duration life insurance policies, including both whole life insurance policies and universal life insurance policies. The maximum statutory valuation rate of interest is defined as a means of representing a conservative net rate for interest earnings for policies liabilities backed by assets.

Although the market's interest rates have been increasing recently, it is impotent to remember something specific: The maximum valuation amount of the interest rate will be based on a calculation that specifically reflects a history of lag within the market's interest rates. This calculation includes past averages from one and three years ago, using interest rates from Moody's Corporate Bond Index.

What does it mean for carriers and for life insurance purchasers when the maximum statutory valuation interest rates see a decrease? Should these people care, and why?, asks Rene Lacape, talk radio show host for, Radio Nueva, a California radio station who hosts a show covering life insurance and financial issues." A decrease in the maximum valuation interest rate could make insurance products a lot more expensive both for consumers and for carriers as well."

If everything else is equal, then lowering this interest rate will more than likely increase the level of statutory reserves for new life insurance product sales, decreasing profits. Carriers need to look at the products that are currently issued, assessing the impact that such a lowered interest rate may have on the profitability of these products.

Some companies have already begun to assess the impact on profit that the Commissioners Standard Ordinary mortality table of 1980 has had in comparison to the 2001 CSO mortality table regarding cash values and reserves.

The decrease in the maximum interest rate for statutory value may be able to offset a decrease in the statutory reserves, and may even be able to require an increase in premiums based on key segments of new life insurance sales. These increased amounts of premiums could actually make it much more trying for insurance agents to place their business.

“If the statutory reserves are increased, then capital levels based on risk will more than likely also increase,” says Rene Lacape.

There still is one potential area of relief that will be provided to insurers when the maximum statutory valuation rate is changed. This is that reserve interest rates that are used when calculated reserves for federal income tax deductibles would also decline in the same calendar year, providing greater room for the tax reserve to increase. This can create a significantly larger tax deduction, lowering taxes all around.

So what are some of the possible impacts on products that will occur as a result of the valuation interest rate decrease? There are a number of different impacts that are possible –

- Carriers may have to move more quickly than before to the 2001 CSO mortality table as a way to receive relief.

- Premiums may see an increase, especially for nonsmokers and younger ages.

- Reserve approaches based on principal may receive a larger amount of attention.

- Where mortality used to have a smaller influence, there may be a greater impact for certain segments if the statutory valuation interest rate should decline.

Given the actual changes and the potential changes, coupled with the likelihood that the four percent valuation rate will stick around for a bit, it will be very important in the near future for insurance carriers to assess individual impacts and cumulative impacts. “We’re not sure how this will all play out but certainly is something to be aware of,” says Rene Lacape.