Whole life products are feeling the pinch of rising interest rates

HOLLYWOOD, Fla. – When it comes to interest rates, life insurers are faced with a problem they have not faced in 35 years.

"One of the questions we've got to wrestle with as an industry is how do you sell portfolio rate products when the yields are worse than new money rates?" said Bobby Samuelson, president of Life Innovators and executive editor of the Life Product Review. "We have not had to wrestle with this question in 35 years. For 35 years we've been in a falling rate environment. We've always been able to have situation where portfolio yields are higher than new money yields, and now their relationship is inverted."

The Federal Reserve voted unanimously this week to leave its primary interest rate in the range of 5.25% to 5.50%. U.S. interest rates are the highest they've been in more than 20 years. That means interest rates on loans such as mortgages have gone up sharply, and so have payments on Treasury bonds and interest-bearing accounts.

Interest rates also have a major impact on life insurance products, both on the investments carriers make and how the products perform for consumers.

Samuelson led a session on the impact of interest rates Thursday at the at the 42nd NAILBA Annual Meeting.

Whole life insurance is a product most impacted by the interest rate changes. For starters, whole life represents 39% of the market share by premium, according to LIMRA. Whole life new premium totaled $1.4 billion in the third quarter, LIMRA reported Thursday, an increase of 3% year-over-year. Whole life sales are down from years past.

"All whole life products are portfolio-based products," Samuelson said. "So this is not an abstract, theoretical question about how you sell portfolio products in the new money environment. This is an existential question for the largest product category in our business."

Portfolio product returns have outperformed new money investments for decades. That is no longer the case and whole life sales are dropping as a result, Samuelson said.

"How do you sell whole life if you're not going to sell the yield attributes?" he asked.

Getting back to the basics of the structure and benefits of life insurance might be the answer to selling whole life, Samuelson said. It's not a short-term investment decision, but a long-term plan that delivers in the end.

"The idea is we're not selling off of yield. We're selling based off of the characteristics of the products," he explained. "And I think as an industry that's always a better choice. Think back to all of the scandals in our industry and they all have one thing in common: We were selling the yield characteristics of the product."

To pursue a long time horizon promised by the typical whole life contract means trusting the life insurance company, Samuelson noted, and most companies have long-term sound financial reputations. The issue for agents is to get around the need for short-term returns.

"No pain, no gain," Samuelson of the whole life performance chart. "And that's kind of a dynamic going on here. You don't have to agree with all of that, but I'm just making the argument that as an industry we have to start thinking differently about how we position our products."

InsuranceNewsNet Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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