New Rules Could Mean Lower Life Insurance Rates

Term life may be cheaper than you think.

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If you've been procrastinating about buying life insurance, here's some motivation: At least two companies have lowered prices on some term life policies, and other insurers might, too, thanks to new state laws about how much money they must hold in reserve.

USAA Life Insurance Co. and Lincoln Financial Group both say they've cut rates for some term life policies, at least in part due to the regulations.

Term life may be cheaper than you think

USAA says its price cuts on new term life insurance policies average 2.6% and range from 0% to 15%, depending on the person whose life is insured. The repricing affects only new policies and took effect Jan. 1, 2017. Older USAA customers who would have faced higher rates to begin with are more likely to see a bigger price drop if they buy life insurance than younger, healthy consumers.

"We're hoping it will cause our members to look again at life insurance," says Shawn Loftus, senior vice president and chief actuary at USAA, which serves active and retired military service members and their families. "The average consumer thinks coverage is actually more expensive than it is."

Industry research bears that out. When consumers were asked last year how much a 20-year, $250,000 term life policy would cost per year for a healthy 30-year-old, their median estimate was $400 — more than double the actual cost, according to a 2016 survey by insurance industry groups Life Happens and LIMRA.

Lincoln Financial reduced some of the prices for its LifeElements term policies, the company said. The new rules were among factors in the repricing.

How new rules could lead to lower life insurance prices

The new regulations, which went into effect in most states Jan. 1, essentially update the method for determining how much money life insurance companies have to set aside in reserve. The old way of calculating that amount used a standardized formula and dated to the Civil War, according to the American Council of Life Insurers.

"Reserves were too high for what they needed to be" on term life policies, Loftus says.

The new method uses a customized approach called "principle-based reserving." It ties the amount of reserves to the company's unique products and risks. As a result, companies don't have to set aside as much money as they did before for some policies, namely term life insurance. It could also mean companies will have to set aside more for some other types of life insurance.

"This "right-sizing" of reserves has the potential to reduce costs to carriers for certain products, which may be passed to consumers in lower product prices," says Mike Burns, senior vice president and head of life and customer solutions at Lincoln Financial Group.

Looking ahead

The new approach to calculating reserves has been in the works for more than a decade. The National Association of Insurance Commissioners led the effort to develop a model law that incorporates the new method. All states have adopted a version of the new law except Alaska, Massachusetts, and New York.

In states where the law is in effect, insurers have until Jan. 1, 2020, to transition to principle-based reserving.

It's difficult to tell how many companies will lower life insurance prices. The American Council of Life Insurers, a trade group, would not comment on pricing.

A 2016 report by consulting firm KPMG said the new reserving approach could make term life insurance slightly more profitable for companies. However, insurers likely would push down prices because of fierce competition, the firm said.

Lower prices aren't the only potential outcome from the new approach. Companies might also use the freed-up cash to develop new products and improve services, Loftus says.

Shopping advice

Looking for life insurance? The same rules for shopping still apply:

  • Get quotes from a variety of companies.
  • Consider a life insurance company's financial strength ratings. Financial strength is important because it indicates the likelihood that the company will be able to pay claims.
  • Consider a life insurance company's customer satisfaction ratings.

Barbara Marquand is a staff writer at NerdWallet, a personal finance website. Email: bmarquand@nerdwallet.com. Twitter: @barbaramarquand.

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