NEW YORK (Reuters) - Some good money news rolled in with the New Year: Life insurance could be cheaper in 2017.
New rules governing the back-end finances of insurance companies went into effect at the start of the year, and some companies are already in the process of lowering prices for individual term life insurance. These policies typically charge a monthly fee over a number of years and provide a payout to survivors if the covered person dies.
USAA, a financial services company that caters to customers with a connection to the military, lowered prices an average of 2.6 percent. Younger people, whose policies are already fairly inexpensive, received the smallest price changes, while those who are closer to age 60 could save around 15 percent.
For example, USAA says a healthy 40-year-old with a $500,000 policy for 20 years would pay $36.65 per month now for a typical policy, down 1.1 percent from last year’s pricing. A 60-year-old healthy male with the same policy parameters would pay $423 a month, down 10 percent.
Other companies will likely follow. It usually takes three to four months for companies to file required paperwork to make changes, said Leonard Mangini, an actuary in New York.
The price changes come because of a process called “principle-based reserving,” which changes the formula for figuring out how much money insurance companies have to put aside to pay off future claims.
For USAA, the new rules meant that the company had a cost savings, and it followed with rate cut immediately.
“We haven’t been able to lower rates in a decade,” said Shawn Loftus, chief actuary for USAA Life Insurance Company. “We elected to go early, because we wanted it so bad.”
Insurance companies across the 46 states that so far have agreed to the changes have three years to right-size their reserve funds. Whether or not individual insurance companies raise or lower prices for new term life insurance policies is not regulated. Prices are set on a case-by-case basis.
What a company does depends on how their reserves were calculated prior to the changes. Not all companies will have a savings, and those that do may not choose to pass that savings onto consumers, said Kim Steiner, a senior consultant at Towers Watson, a benefit consultant.
Nevertheless, if some companies lower prices, there may be a competitive shift. “I think the general consensus is that rates are going to come down,” said Patricia Born, a professor specializing in insurance at Florida State University’s College of Business.
Shopping for individual term life insurance policies is a relatively easy process, and switching from an existing policy to a new one is not that complicated, Born said. There are many websites that aggregate price quotes if you input some of your personal information, such as nerdwallet.com or insurancequotes.com, and you can also call individual companies or an insurance broker.
For those who do not already have a policy, it is a good time to take the leap. Only 70 percent of Americans have any kind of life insurance, according to the life insurance research group Limra, with half of those being employer group policies that do not often offer the recommended level of coverage.
“Price is one reason people don’t buy insurance, but it’s also the process,” said Steiner. People tend to also be stymied by the paperwork and the medical evaluations, not to mention confronting their own mortality.
Editing by Lauren Young and Cynthia Osterman