Why insurance rates have risen

The cost of life insurance has gone up several times over the last four years, and some providers have even scrapped their permanent products to focus on adjustable insurance rates or term insurance.

So why is this happening?

Insurance companies have increased their fixed premiums for two reasons:

Interest and bond rates had remained low for an unusually long time.

Insurance companies need to invest their money in order to make a profit. Premium rates are calculated based on mortality, expenses and interest. If interest rates go down, the company needs to invest more money in order to turn a profit and ensure it has sufficient reserves to pay claims. (By law, insurers must have enough assets to cover at least 120% of its debts.) To have that extra investment capital on hand, they need to charge higher premiums.

Insurers changed to a new accounting standard in 2012.

The International Financial Reporting Standards (IFRS) became mandatory for most publicly accountable, profit-oriented companies in 2012. Investment and segregated funds followed in 2013. The intent of these rules is to present a reporting standard that’s understandable, comparable and relevant. They do not, however, take into account the fact that businesses with very long-term liabilities—like insurance companies—operate differently.

The insurance companies have claimed adopting IFRS will lead to higher capital charges, which means they’ll need to divert more funds toward capital reserves to ensure they can pay policyholders.

When to buy

If you need to protect yourself from risk today, consider an adjustable-rate policy. These policies are priced under current interest rates, but insurers will lower premiums in future when rates rise. Predictions on when the U.S. Federal Reserve will raise its key rate vary; it’s currently expected to go up in late 2014 or 2015.

The alternative is to wait until interest rates rise and buy permanent or term insurance after the policies have been re-priced.