Yes, you can add life insurance to the list of products and services permanently changed by Covid-19. What you buy and how you buy it, will never be the same again. But perhaps not in the way you would think.
Credit unions have long recognized the value of life insurance both as an important employee benefit and as an opportunity to enhance investment yields. Group life insurance policies require no medical pre-qualification and are generally designed to cover final expenses. Key-person insurance, split dollar life insurance and credit union-owned life insurance (“CuOLI”) policies are underwritten on a case-by-case basis, which includes a medical assessment of the insured.
It is this second category of insurance that has been dramatically affected by the Covid-19 pandemic. The good news is, the changes are actually making life insurance more accessible, and potentially a more dynamic asset for credit union portfolio managers.
The idea that a life threatening (more to the point, life shortening) virus outbreak on a global scale would make life insurance easier to obtain is counterintuitive. Shouldn’t Covid-19 make life insurance more expensive and harder to get?
Not so much. At least not yet. According to a recent Wall Street Journal article, insurers are generally taking a wait and see attitude. “The long-term impact of Covid on life expectancy is still an open question,” Telis Demos writes, “as of earlier this year, life insurers generally hadn’t increased premiums during Covid-19.”
What did change? First of all, insurers pushed out plans already in the works for a more streamlined medical assessment process. Try selling a product that requires a lab technician to visit your home and stick a needle in your arm at the height of a pandemic outbreak. Folks were not excited about that. So, life insurance companies fast-tracked “fluidless” underwriting as well as algorithmic methods that rely on big data and other predictive models. These new techniques for assessing risk had been in the works for a while and will most likely remain in place permanently, making life insurance more accessible to the consumer.
Another, more predictable result of the pandemic is, it got people thinking more about life insurance. Particularly, younger people. In an article titled “Covid-19 Pandemic Motivates Younger People to Buy Insurance,” Leslie Scism reports that application activity was up nearly 7.9% year-over-year in 2020 for people under 45. When insurance companies can spread their risk over a younger pool of insureds, they can price it better. That means lower premiums for the consumer.
Perhaps the most significant change to life insurance brought on by the Covid-19 pandemic involves a change to the IRS code. The Consolidated Appropriations Act of 2021, ostensibly a Covid-19 relief spending bill, signed in the waning days of December 2020, snuck in an IRS rule change that had every life insurance actuary in the country clearing their 2021 calendar.
Without getting too much into the weeds, the change reduces the minimum interest rate used in the “definition of life insurance” test found in Section 7702 of the IRS code, from 4% to a variable rate that will now be around 2%. The 4% rate was put in place back in 1984, when policymakers were looking for a minimum rate that any respectable life insurer could reasonably achieve in its general portfolio. That sounds almost comical in today’s low interest rate environment, but it’s been no joke for life insurers who have had a real and practical problem maintaining their product lines under the 4% rate definition.
Life insurers welcome the change. Many have already implemented the changes despite the far-reaching implications to marketing materials, software upgrades, and even agent commissions. Every life insurance company must update their entire product line to the new 7702 guidelines by 2021 year end.
For cash value life insurance policies, which credit unions utilize for CuOLI, split dollar and deferred compensation plans, it means life insurance policies will now be able to hold significantly more cash value without losing their very favorable tax treatment. It means life insurance companies should have significantly more flexibility in their reserve requirements, opening new investment options to life insurance portfolio managers that should in theory lead to more efficient cash value growth.
For the present, the Covid-19 crisis appears to have inspired some positive developments in the life insurance industry, both for insurers and consumers. The application process is easier and less invasive, premiums are at all-time lows, and the tax code changes attached to the relief package were long overdue. Credit unions would do well to take a fresh look at the role of life insurance in their benefit programs.
CourseMark is a CUES Supplier Member.