The US is officially in a pandemic-driven recession, according to the National Bureau of Economic Research. With economic uncertainty and unemployment numbers rising, many people are getting their financial affairs in order — and looking at life insurance.
If you have dependents, it’s worth considering a policy if you can comfortably afford it. And there are ways to make your premiums more affordable.
Can I buy life insurance during a recession?
Yes — as long as you can pay your premiums.
As part of your application, your insurer will request information about your finances. You can expect to be asked about your income and place of employment, and possibly your net worth.
These details help your insurer determine whether you can afford a policy, as well as how much coverage you can buy. For example, if you earn $30,000 a year and you want to buy a policy worth $1 million, you’ll need to prove that you have other income to support such a large policy.
Do life insurance rates increase during a recession?
Not necessarily. Despite the economic uncertainty, life insurance companies don’t usually raise their rates during a recession. They have investment managers that prepare for short-term volatility, and a lot of money in the bank — so to say — to withstand less profitable periods.
However, if a recession lasts longer than expected, insurers may incrementally increase their rates. If that happens, it shouldn’t affect term life insurance premiums too much. But it may impact the cost of permanent policies, like whole, universal and variable life insurance.
That’s because permanent policies are tied to the market. When interest rates drop — as they often do in a recession — insurers’ profits on those products may drop, too. Plus, permanent policies last a lifetime, so the insurer has to assume a higher risk to issue them.
To protect their bottom lines, life insurance companies might raise their rates. But again, it’s rare for a recession to last so long that insurers are forced to do that.
I already have a life insurance policy. Will my premium change?
No. Once your life insurance policy is issued, your insurer can’t change your premium — even during a recession.
If you’re struggling to pay your premiums during this time, you’re not alone. Before missing a payment, ask your life insurance company if they have a premium relief program. Many state insurance departments instructed insurers to offer flexible payment plans and extend grace periods in light of COVID-19.
How do I know if my insurer can still pay out my policy?
As with any other industry, life insurance companies can go bankrupt — but there are protections in place for policyholders.
Every state has a guaranty association, which steps in if a company can’t cover its debts and takes over the policy payouts. There are limits, though. Typically, guaranty associations can pay up to $300,000 in death benefits, and $100,000 in cash value.
Many insurance companies also have reinsurance companies, which act as a financial backup. If your insurer can’t pay out your full claim, the reinsurance company will make up the difference.
How to pick a financially stable life insurance company
When you’re comparing life insurance companies, look at their financial strength ratings.
These ratings reflect an insurer’s financial stability, and point to its ability to pay claims in the foreseeable future.
There are four major ratings in the US. Each agency has its own ratings system, and these are the best ratings for each:
- AM Best — A++
- Moody’s — Aaa
- Fitch — AAA
- Standard & Poor — AAA
If you come across an insurer with a poor rating, that means they may not have the cash reserves to meet their financial obligations.
Ratings are updated regularly. Thanks to the recession, AM Best has downgraded the ratings of some life insurance companies in the US at the time of writing. These include:
- American Income Life Insurance Company
- Brooke Life Insurance Company
- Genworth Life Insurance Company
- Globe Life and Accident Insurance Company
- Jackson National Life insurance Company
- Liberty National Life Insurance Company
- National Income Life Insurance Company
- Ohio National Life Insurance Company
- PHL Variable Insurance Company
- Transamerica Life Insurance Company
This doesn’t necessarily mean these companies now have a bad rating — but it’s lower than it was before the recession hit. If you’re in the market for a policy, choose a financially stable company by comparing ratings.
The best life insurance companies in the US, ranked
Should I buy life insurance during a recession?
It depends on your financial situation and whether or not you have emergency savings.
If you have loved ones who rely on your income and you don’t have enough savings to self-insure, a policy can provide a financial safety net. That way, if you die prematurely, your family can use the payout to stay afloat and figure out their next move.
Most people put the death benefit towards these expenses:
- Mortgage or rent payments, which could help your family to stay in their home
- Everyday living expenses, like groceries, utility bills and car insurance
- Childcare or school tuition
- Paying off outstanding debt, such as student loans and credit cards
- End-of-life costs, like a funeral or unpaid medical bills
- Care for ageing or ill parents
If you have an investment portfolio or retirement policy, a life insurance policy can also help to make up for any losses in the stock market.
Average costs of life insurance
To give you an idea of how much you’ll pay for a policy, these are the average monthly rates for a healthy individual looking for a 20-year term life policy.
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How to find cheap life insurance
There are a few ways to lower your premiums:
- Choose term life insurance. It’s the most affordable policy on offer, and provides protection for a set period of time — like 10, 15 or 20 years.
- Buy a policy as soon as you need it. The younger and healthier you are, the less you’ll pay for coverage — so try to lock in a low rate as soon as possible.
- Go for a medical exam policy. If your goal is to save, opt to take a medical exam because no-exam policies cost three to six times more. The exam itself is a simple physical, and the insurer picks up the tab.
- Manage your health. Insurers assess your BMI, cholesterol levels and blood pressure, and ask about your medical history. If you can prove that you’re leading a healthy lifestyle and have any pre-existing conditions under control, you’ll get a better rate.
- Stick to basic coverage. For low premiums, don’t add riders to your policy unless you really need them.
- Shop around. Rates can vary wildly between insurers, so compare quotes from a range of companies before signing off on a policy.
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Ask an expert: What financial products are more or less important than life insurance during a recession?
“You do need the basics covered first, so I would say food, shelter, an emergency fund and other necessities are at the top of the list. If anyone is depending on you financially, life insurance is a close second. Then, you have to look at retirement savings and maybe college savings for your children.
When does it make sense to buy life insurance during a recession?
Life insurance is one of those products that is better to buy five years early than five minutes too late. We never know when our time will come. For this unknown, the sooner you have life insurance in force, the better.
Also, life insurance gets more expensive the older you are, so lock rates in ASAP when they will be less expensive. The other thing to consider is that your health is a factor for approval, too. If you are healthy now, that will help you secure a lower rate. If you wait, a health issue or accident could pop up that will make life insurance more expensive or harder to obtain.
What are the benefits of buying a permanent policy?
In addition to a death benefit, a permanent policy can provide cash accumulation without stock market or tax risk. As the government spends more and more to help bail the country out of a recession, there is a high chance that taxes will increase in the future. This is why it is very important to have some of your money in a tax-free option such as life insurance. Even if taxes increase a lot in the future, your cash in your life insurance policy will not be affected by increasing taxes.
In our global economy, there is a lot of volatility in investments. This is another reason to have life insurance in your portfolio. It allows you to participate in the gains during an up market and will protect you from loss when the market is down. If you need money for a large purchase or just to keep yourself afloat during tough times, a properly structured permanent life insurance policy is one of the best places to get money from.
A 401(k) or IRA will charge penalties and taxes to use your money (with a few exceptions) before you are age 59.5. You can use money from your life insurance policy without penalties and taxes. Also, it does no matter if you are employed or not, when you use your money and the repayment terms are up to you.
Ask an expert: If you have a permanent policy, what are the best investments during a recession?
Only a Variable Universal Life (VUL) policy allows you the flexibility to choose from a wide array of investment options. Universal Life (UL) policies, on the other hand, only allow you to invest in the life insurance company’s general account bond portfolio or an indexed fund.
If you have a VUL policy, you do not want to invest in a bond mutual fund within that policy. The reason for this is that the expenses for investing in a mutual fund within a variable universal life policy can be very expensive, but current bond yields are very low. If you invest in a low-yielding bond mutual fund — or a mutual fund with heavy exposure to bonds — within a life insurance policy, you could be paying anywhere from 33% to 50% of the gross return in investment fees. And that’s before the insurance charges start to kick in.
For this reason, if you have a VUL policy you want to focus on a couple of strategies that maximize the risk-adjusted return and make the tax-free benefits of life insurance worth the insurance expense and limitations on liquidity:
1. A total return S&P 500 index fund: This type of fund will track the S&P return and have low expenses relative to other actively managed funds. Keep in mind that only a small portion of actively managed funds beat the market in the first place. This type of fund takes full market risk, however. So if the market crashes, the account values in the life insurance policy will too.
2. An S&P 500 index fund with a floor and a cap: For those who don’t want to take full market risk, they should choose an S&P 500 index fund that floors the losses to protect the policy owner in exchange for only providing part of the gain when the market does well. This is essentially the indexed universal life option described earlier.
Life insurance is an important part of financial planning, especially if you have dependents. You can still purchase a policy during a recession, but you’ll want to take a closer look at two things: the cost and the financial stability of your insurer.
To find a policy that fits your budget, compare life insurance companies.