The interest rate environment has a significant impact on many segments of the financial sector, including the insurance industry and especially the life insurance industry. Interest rates, of which there are many, have been in secular decline since the 1980s (Figure 1, below).^[1]   But from the time of the 2008 financial crisis until just recently, interest rates were at historic lows. Prolonged periods of low interest rates negatively affect the financial performance of life insurance firms in multiple ways. This created investment tension as carriers push as far out on the risk/return spectrum as possible. Life insurers keep comparatively large balance sheets, and a substantial share of their assets (over 60% in the aggregate) ^[2] are interest-earning bonds. With lower interest rates, investment earnings on bonds decline. This resulted in premiums, deposits, reinvestment of interest income and returns of principle on maturing fixed-income securities being placed into lower-yielding investments (short to intermediate treasuries), which will push net investment income down over time. The spread between interest earned and interest credited was severely compressed, which not only reduces net income for the insurer but also has forced them to lower the dividend they credit on in-forced policies. In addition, the earnings on some life insurance products, such as annuities and cash value life insurance policies, depend on the spread between what life insurers earn in interest and what they credit in interest to the customer. Many of these products have a guaranteed rate of return to the consumer, which means the interest credited to the consumer by the life insurer is fixed. All else equal, life insurers’ earnings on these products are higher when market interest rates are higher because the spread is higher. When market interest rates are low, the spread is compressed, and therefore, so are earnings. Carriers were forced to considerably lower the dividends they credited to enforced policies.

 Because of the 15-year time period of low interest rates Whole life and Universal policies that receive their crediting from dividends have underperformed their initial illustrations. The initial policy was illustrated with an assumed dividend rate and that rate has been decreased over the life of the policy and is lower than when initially purchased. Most policies 8 years and older have underperformed their illustration. Worst case scenario that means policies could lapse before the illustrated date even though the premiums are still being paid and while the policy owner is still alive. This is an industry-wide problem, not just one or two companies. Also, the older the policy is, the more profitable it is for the insurance carrier. It's time to review your life insurance policies before it's too late.

[1], [2] Source: National Association of Insurance Commissioners. Guarantees are based on the claims paying ability of the issuing company. 

“The best time to repair the roof is when the sun is shining” 

John F. Kennedy