Over the past few years, the life insurance industry has experienced a pandemic, lockdowns, underwriting restrictions, work-from-home disruptions, life insurance tax law changes and volatile economic conditions.
Life insurance premium sales soared 18% in 2021 as the result of increased consumer demand for life insurance, coupled with the impact of tax law changes allowing higher premiums per dollar of death benefit to qualify as life insurance. Total life insurance premium sales were up 11% through the first half of 2022.
LIMRA foresees this momentum shifting in the years ahead. Even though sales were up in total through the first half of 2022, the strong consumer demand for life insurance experienced in 2020 and 2021 began to wane. We believe sales that occurred as a result of the tax law changes were mainly one-time sales and we expect noticeable corrections in the near future for most product lines, with the exception of term insurance.
Variable universal life and indexed universal life will experience most of these tax-law-change corrections in the second half of 2022 and into the first half of 2023.
Required premiums for whole life insurance generally increased due to the tax law change, and some companies experienced extra sales at the end of 2021 — before the effective date of the price increases. In addition, a second one-time sales correction occurred due to a regulation in Washington state, which prompted a fire sale of long-term care insurance combination products as well as stand-alone LTCi products in late 2021.
While premium sales are up in total, policy sales are down 9% through the second quarter, a sign that consumer demand is waning. Term premiums have decreased in the past three quarters, and whole life is up only slightly year to date. Term and whole life are key products for middle-income consumers.
During this time period, inflation persisted for much longer, and at a higher rate than many expected. Inflation has a negative impact on sales to middle-market consumers, and that impact is seen most likely in term and whole life products.
Through November 2022, the Federal Reserve raised the federal funds rate for four consecutive months, each time raising its benchmark interest rate 75 basis points. The Fed took an aggressive stance against inflation, at the risk of slowing the economy into a recession.
The aggressive short-term interest rate increases ripple through to longer-term interest rates as well, including the 10-year U.S. Treasury rate. The 10-year U.S. Treasury is a benchmark for many life insurance companies both for what the company can receive in return for its own asset portfolio and as an indication of the return it can use in the pricing of its life insurance products.
The 10-year Treasury has risen quite dramatically throughout 2022.
In general, rising interest rates are not a risk (on their own) to life insurance companies, as long as there is enough time to adjust pricing and product development to match the economic conditions. However, dramatic changes in interest rates — whether up or down — do present risk, as companies do not have time to respond appropriately. If interest rate patterns change abruptly, there are risks to both sales and in-force business, especially to products linked to insurance company general accounts.
Considering all these factors, LIMRA forecasts life insurance sales to be relatively flat in 2022 and 2023, with the risk of sales declines being greater in 2023. If the economic environment improves over time, we anticipate a return to growth in 2024. If our industry can continue to educate consumers about the need for life insurance and enhance the innovative solutions for the underserved markets, it may be possible to improve sales, at least partially, prior to 2024.