The Wall Street Journal


October 12, 2005









Premiums to Drop
Again Next Year


October 12, 2005; Page D2

Premium rates for individual life insurance are expected to drop 3% next year, according to a study being released today by the Insurance Information Institute. The anticipated drop continues several years of declining rates for individual life-insurance policies.

The projected rates mean a 40-year-old male nonsmoker will pay a $641 premium on a $500,000, 20-year term life-insurance policy in 2006 if he qualifies as a "standard" risk. The same individual would have paid $660 this year, $715 in 2004 and $1,050 10 years ago.

"We would not be surprised by news next year that consumers are paying less for coverage," says Whit Cornman, a spokesman for the American Council of Life Insurers. "The cost of life insurance has been declining" for quite a while.

The trend could prompt some life-insurance policyholders to replace their existing policies with new ones purchased under the lower rates. About 14 million life-insurance policies were purchased on average annually from 2000 to 2005, compared with the 11.7 million policies purchased on average each year from 1997 to 1999. The recent figures, however, are still below the 17 million average annual purchases from 1970 to 1985.

"If you'd bought a life-insurance policy 10 years ago, rates have dropped so much you might be paying less now if you replaced it," says Dr. Steven Weisbart, an economist at the Insurance Information Institute, a New York-based trade group.

Among the factors fueling lower premium rates are increased life expectancy, industry competition and corporate operational efficiencies, according to the III.

Another factor: the growing popularity of term life insurance, which entitles policyholders to benefits over a fixed period of time. Term policies offer lower premiums than those for permanent life insurance, which pay death benefits regardless of how long a policyholder lives. These days, about half of individual policies purchased are term policies, up from about one-third in 1998, according to the III.

In recent years, life insurers have also improved their methods for assessing policyholders' life expectancy and medical risks, allowing them to assign more customers a "preferred" risk rating that signals they meet higher health requirements and qualify for lower premium rates than those who receive a "standard" rating. Preferred rates have remained flat since 2003, while standard rates have declined. Both are expected to decline this year.

An increase in long-term interest rates next year could also contribute to lower premium rates, since life insurers often hold sizable mortgage and bond investments in their financial portfolios, according to the III.

State insurance regulators' increasingly stringent reserve requirements have offset the decline in life-insurance premium rates in the past few years. In an effort to bolster insurers' financial stability, regulators have upped the amounts insurers must hold in certain liability accounts. This initiative has aimed to protect customers in the long run but has prevented insurers from steadily dropping rates, according to the III. This trend could continue next year and keep premium rates from declining as sharply as projected, the institute says.

Write to Diya Gullapalli at diya.gullapalli@wsj.com4