Life Insurers
Raise Coverage Limits

Falling Policy Premiums,
Less-Expensive Alternatives
Spur Loosened Restrictions

By CHRISTOPHER OSTER
Staff Reporter of THE
WALL STREET JOURNAL
October 27, 2004; Page D4

Insurance companies, frustrated by falling premium rates and the growing popularity of inexpensive term insurance, are raising the limits of how much coverage consumers can buy.

MetLife Inc. is the most recent insurer to announce that it is increasing the coverage limits. A 30-year-old earning $100,000 a year can now buy as much as $3 million in life insurance, up from $2 million previously. MetLife isn't alone: New York Life Insurance Co. increased its limits in March, and Prudential Financial Inc. did the same late last year. More insurers are expected to follow suit.

The companies are making it possible for 30-year-olds, for instance, to buy coverage for as much as 30 times their yearly earnings instead of the previous 20 times. The old rule of thumb in buying life insurance was that a death benefit equaling seven to 10 times a person's annual salary was enough for the average policyholder. In practice, consumers don't even buy close to that: The average is about 2.5 times annual income, according to MetLife.

The boost in coverage limits is a big change for the industry, which has feared that expanding coverage would encourage foul play. Insurers first imposed limits to reduce the likelihood that people would buy policies with the intention of killing themselves and giving their beneficiaries the death benefits. (A common misperception is that insurers don't pay on suicides, but they typically will if the policy is more than two years old.)

Some skeptics say insurers are pushing higher limits at a time when more-traditional -- and expensive -- whole-life policies are losing popularity in favor of cheaper term coverage. (Whole-life policies combine a death benefit with an underlying cash value that grows over time.) The higher limits also come at a time when long-term interest rates are hovering around 4%. With lower interest rates, and the resulting low return on investments, the money a policy pays out to replace a person's income may not last as long as some policyholders think. And to make up for slipping whole-life sales, insurers are pushing consumers to buy more coverage -- particularly term-life policies, which offer a death benefit for a set period of time.

[Chart]Indeed, sales of whole-life policies have fallen dramatically. In 1980, whole-life premiums accounted for 80% of all life-insurance sales. That number is now 27%, according to industry group Limra International. Term-life premiums account for 22% of all life sales, up from 13% a decade ago.

The increases in coverage limits come amid an investigation by New York's attorney general of insurance sales practices. Thus far, most of the discussions about reforming insurance sales have focused on sales to businesses, not consumers.

Given interest rates and the fact that the value assigned to lives in wrongful-death suits are frequently much higher than death benefits, insurers say the new maximums now represent a reasonable amount of coverage -- not an incentive to kill oneself.

MetLife increased its limits because the company often heard "laments that the money is not enough" when it paid death benefits, says Joseph W. Jordan, MetLife senior vice president for individual business. He says a $1 million death benefit "isn't much" for a family of a person who was making $150,000.

MetLife customers 30 years old and younger -- even without a spouse or children -- can now purchase coverage equal to 30 times their annual salaries, up from 20 times. Individuals between the ages of 30 and 40 can purchase coverage as much as 25 times their salary. The maximum for those between ages 40 and 50 is 20.

Rates for term insurance are so low that once-unheard-of levels of coverage are easily affordable. Over the past 10 years, term rates have fallen by 50% and more.

A $1 million, 20-year term policy for a healthy 35-year-old man carries an annual premium of about $500. For a whole-life policy with a similar death benefit, the annual premium is about $11,000, according to AccuQuote.com, an online life-insurance broker.

Peter Katt, a fee-only life-insurance adviser in Kalamazoo, Mich., says that to replace a person's salary indefinitely, assuming a 4% return on low-risk government bonds, an individual needs a policy with a death benefit of 25 times his or her salary.

That number, though, assumes there are no other assets surviving family members can tap and that a surviving spouse won't return to work. The number doesn't include any Social Security benefits the family will collect. Such considerations are relatively easy to take into account using calculators on the Internet designed to help estimate how much life insurance a person needs, including those at AccuQuote.com and SmartMoney.com.

The trade-off with term life insurance, though, is that when the policy's term is up, there is no residual value to the policy, whereas a whole-life policy has a cash value that builds up over time.

Write to Christopher Oster at chris.oster@wsj.com1