2013 - NAIC - State of the Life Insurance Industry: Implications of Industry Trends - 220p
- 2013 - NAIC - State of the Life Insurance Industry: Implications of Industry Trends - 220p
- (p16) - The continuation of high interest rates coupled with financial deregulation in the early 1980s pushed up returns on insurers’ competing financial products such as Treasuries, money market accounts and emerging mutual funds.
- (p17) - Long-term interest rates were substantially lower than short-term interest rates due to an inverted yield curve at the time.
- As such, insurers’ investment portfolios of predominately long-term bonds were unable to support competing crediting rates.
- Consumers responded by withdrawing their cash out of their whole-life policies (through surrenders or policy loans) and moving their savings dollars into competing products offering higher returns (a process referred to as disintermediation).
- Although consumers still sought income protection through low-cost term policies, insurers’ whole-life policies had fallen out of favor with long-term investors.
- (p17) - Prior to the 1980s, insurers sold primarily fixed-premium term and whole-life insurance to individual policyholders.
- With competitive pressures significantly reducing sales of whole-life products, insurers had little choice but to innovate in the 1980s to meet demand.
- They did so by redesigning whole-life into a hybrid product that included a traditional income protection component and a long-term investment component using market-based yields (and thus were interest rate–sensitive).
- The first of these new complex products, universal life insurance, revolutionized the industry. Its popularity was rooted in its flexibility.
- (p17) - Universal life is permanent insurance combining term insurance with a cash account earning tax-deferred interest. Under most contracts, premiums and/or death benefits can fluctuate (within the contract’s bounds) with policyholder preference.
- The policy stays in effect as long as the cash value is sufficient to cover premiums.
- Additionally, the insurer usually guarantees the cash value will not fall below a minimum value.
- The cash value of the policy can also be used to pay the term insurance portion of the policy.
- (p17) - Variable life insurance was developed in 1976 as a way to protect policyholders’ benefits by hedging against the high inflation of the time.60
- Premiums, fixed by the insurer, are deposited into the separate account.
- Cash values reflect the performance of the underlying investments, which were designated by the policyholder and included such things as stocks, bonds, and mutual funds.
- Although death benefits fluctuate with the performance of the underlying assets, the insurer guarantees a minimum death benefit.