Skip to main content

Why Life Insurance Premiums Are Expected to Decrease

By U.S. News & World Report

For the past decade, the insurance industry and state regulators have been working on a new system for how life insurance companies determine whether they have enough money in reserve to pay out their claims. Known as principle-based reserving, the framework has been adopted by 46 states and was rolled out across the nation on Jan. 1, 2017. Insurance companies have three years to transition to the new system that uses simulation models to estimate the necessary reserves to cover future claims. Some experts in the industry expect life insurance premiums to drop as companies adjust to the new reserve requirements.

[Read: 10 Things You Didn’t Know Life Insurance Could Do.]

The move to modernize life insurance reserves. The use of principle-based reserves represents a major shift for the industry, and one that reflects the changing face of life insurance policies. “If we go back 50 years, most of the life insurance products were very similar,” says Nancy Bennett, senior life fellow with the American Academy of Actuaries. So it wasn’t too problematic that state regulators required insurers to use a standard formula to determine how much cash to keep in their reserves for claim payments.

However, the market has changed significantly, and companies now offer a variety of term, whole and universal policies. As a result, the old rigid system of calculating reserves no longer worked. In some cases, companies had accumulated large reserves, “far larger than what you would think would be needed,” Bennett says.

Since the formula didn’t allow for variations, companies were unable to adjust the size of their reserves on their own. “We and other companies went to the NAIC [National Association of Insurance Commissioners] and said we want to work with you to right-size the reserves,” says Shawn Loftus, senior vice president and chief actuary of USAA Life Insurance Company. The result of that work is the new principle-based reserving model, which offers companies more flexibility when determining how much capital to have on hand. The first wave of regulations affects two types of polices: term life and universal life with secondary guarantee.

[Read: Should You Use Life Insurance to Fund Your Retirement?]

Some premiums may go down. Bennett says it’s hard to tell whether premiums will be affected as a result of the new principle-based reserves, but those in the industry are optimistic consumers will see savings. “The big picture from our end is this rule is going to make life insurance premiums cheaper,” says Justin Halverson, founding partner at Great Waters Financial in Minneapolis.

Term life insurance, in particular, could benefit from the change. According to a 2012 Impact Study from NAIC, companies are projected to reduce their reserves anywhere from 38 percent to 64 percent as a result of principle-based reserving. Loftus says USAA Life expects to drop premiums by up to 15 percent on some policies, with the average savings being 2.6 percent. Reduced premiums only apply to new policies and will not affect current customers.

The situation for universal life with secondary guarantee is a little more complex. Joseph E. Roseman Jr., managing partner for O’Dell, Winkfield, Roseman and Shipp in Charlotte, North Carolina, says the structure of permanent policies shifted from whole life to universal life in the late 1970s and early 1980s. During the next two decades, business for universal life boomed, but reserves didn’t always keep up. “They were minimally funding policies,” he says.

Now, the new regulations may result in some of those universal life policies needing to beef up their reserves. The 2012 Impact Study found some reserves may drop as much as 44 percent while others may need to boost their coffers by up to 63 percent. However, better reserves mean consumers can feel confident their plan will remain solvent. And life expectancy tables have been recalculated so premiums will be spread over a longer period, a change that should keep premium increases to a minimum.

Lower your life insurance premiums. Consumers shouldn’t expect to see their existing premiums drop as a result of principle-based reserves. The lower prices will only be for new policies, but that should still be welcome news for those living on a tight budget. “About 35 percent of our members are living paycheck to paycheck, so price is a big deal for them,” Loftus says. To find out if they can take advantage of lower premiums, the company is recommending all its members conduct an annual insurance review.

Part of that review includes getting quotes for a new policy or additional coverage to supplement an existing policy. Halverson cautions anyone getting quotes to be sure the company in question is actually using principle-based reserves. While some firms, such as USAA Life, are implementing the change immediately, insurers have until Dec. 31, 2019 to comply. And a handful of states have not yet adopted the new framework.

[Read: 10 Financial Perks of Getting Older.]

“[Another] big warning would be to not go dump your current coverage,” Halverson says. Getting a quote at a lower cost doesn’t mean the company will sell you a policy. The results of a health exam, for example, could result in an application being denied. “Make sure you’ve had a guaranteed offer,” Halverson urges.

Principle-based reserving represents a major change for the insurance industry, and it could have benefits for your bottom line as well.

More from U.S. News

12 Financial Terms Every Retirement Saver Should Know

10 Costs to Include in Your Retirement Budget

10 Ways to Get Ready for Retirement After Age 50

Why Life Insurance Premiums Are Expected to Decrease originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
Read Next Story

Related News

Frustration grows in Venezuela as earthquake death toll reaches 1,430

Israel and Lebanon sign framework agreement with US in ‘first step’ toward peace, Rubio says

Trump-endorsed populist poised to become Colombia’s next president as rival challenges vote