Broker Check

It might be a good time to get a check up on that old life insurance policy


it's too late!

Earnings spread compression is the most significant risk in a prolonged low interest rate environment. This essentially refers to the shrinkage of yield spreads, or the difference in yields between safe U.S. Treasury securities and comparably maturing investments, such as corporate, municipal and federal agency obligations and other asset classes, like real estate. It should be noted that insurance companies’ investment choices are highly regulated and limited, which generally leads to safer and lower-yielding assets.

Insurance companies, through their new business issuance activities, normally provide some guaranteed rate of interest. As interest rates have come down, insurance companies must properly lock in a positive differential between what they earn on their investments (equities and bonds) and what they pay out on these contracts. Otherwise, there will be a mismatch between what is earned and what is paid. Since yields have been so low, companies are essentially starving for yield. This creates investment tension as carriers push as far out on the risk/return spectrum as possible, while respecting the need to balance their willingness to increase their risk for yield when there may be no perception that the risk is any lower.

This results 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. In a prolonged low interest rate environment – in which rates remain consistently below those that insurers assumed when they priced these products – the shortfall in investment income will lower earnings and probably negatively impact credit ratings.

 “The best time to repair the roof is when the sun is shining” John F. Kennedy

With the extended low interest rate environment many policies have seen a reduction in the dividend payments credited to the policy compared to when it was originally purchased.  Has Yours?

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