Higher Taxes, Lower Rates, Longer Life Means Need for Life Insurance syrockets in 13
I knew it’s time for a New Year’s resolution when I stepped on my new scale today that I had received for Christmas and “it said one a time please.” Buying more life insurance is not typically at the top of one’s shopping life for the end of the year during the holiday or at the top of the resolution list headed into the New Year. Making it’s because of all that Butterball Turkey consumed along with Grandma’s homemade pumpkin pie that makes it a challenging time of the year because of underwriting. It should be at the top of the list , however, and one year annual renewable term rates upon which all life insurance rates are based will probably not go much lower even though medical strides continue to add blessed longevity to many lives and make the role of income planning even more important today than ever before. Despite these facts, the percentage of U.S. households with life insurance coverage is at its lowest in 50 years, leaving millions of families without a safety net. No telling how many are underinsured which is more difficult to factor. Less than 50% of Americans have an individual life insurance policy and 30% have no employer sponsored policy. Some 11 million households with children under 18 where the coverage need is greatest have no coverage at all.
Now here’s the unique challenge that many pundits, including industry experts, have overlooked: with lower interest rates, longer life expectancies and higher tax rates, the need for life insurance is greater than ever. Even during life insurance industry awareness month this past Fall, I did not see one article emphasizing how the fiscal cliff, taxmageddon, and lower interest rates are ratcheting up the needed coverage in a staggering way. I thought it might be interesting to take a trip down memory lane as the New Year ensues and look at what net income levels an adequate amount of insurance produced for beneficiaries 10 years ago according to Ameritas Life for an American regardless of age based on the income needs of your family. The chart below shows the Bush era tax rates for an average family where the beneficiary is able to produce a 5% income return. It was done in 2003 when the average rate on a good old investment grade bond fund was 8% or a fixed annuity was 9% as the economy recovered from the tech wreck of 2000-2003. Many annual point-to-point cap rates were in the 10-12% range as well on fixed indexed annuities. The chart below does not consider inflation rates which at last year’s rate would destroy the below death benefit principal sums in a little over 14 years. With life expectancies continuing to increase, the need for life proceeds to last longer in whatever investment or savings vehicle they are deposited in is even greater. With expected tax rates to go up across the board unless an agreement is reached, a family in New York or California that spends $25,000 for final expenses could need double the $100,000 that they needed 10 years ago or $200,000 just to produce the same level of income because most comparable interest rates today are at 2.5% for corporate bonds or half of the projected 5% that the chart assumes.