By Leslie Scism
U.S. insurers are doing the once unthinkable, turning away business from some Americans who want a life-insurance policy.
The driving force behind the action: a collapse in interest rates tied to the spread of the new coronavirus and an expectation from insurers that rates won't rebound significantly anytime soon.
Life insurers earn much of their profit by investing customers' premiums in bonds until claims come due. In simplest terms, when they price policies, they make assumptions about how much interest income they will earn investing these premiums years into the future. The less they earn, the more they may need to collect in premium or fees to turn a profit.
For now, a wave of stopgap measures is hitting potential buyers even as some companies say more consumers are seeking out life insurance during the coronavirus pandemic. In addition to suspending sales of some popular products and raising prices, insurers are also scaling back policy sizes and reducing benefits.
"In 33 years, I have never seen more changes come more quickly to the life-insurance products we sell," said Lawrence Rybka, chairman of ValMark Financial Group, an insurance brokerage in Akron, Ohio. "It is unprecedented how fast and widespread -- it is across lots of carriers."
His staff has had a hard time keeping up with insurers' bulletins, and they have less time to redirect business to insurers still willing to issue certain types of large policies, he said. Historically, insurers would give a month or 60 days before a change became effective. Now, two weeks is common.
Some insurers are reacting directly to the new coronavirus.
Penn Mutual Life Insurance Co., among others, has temporarily halted life-insurance sales to people 70 and older and who are in poor health. Insurance-industry executives say that analysis shows older people with underlying medical problems are dying at much higher rates from Covid-19 than younger people.
In a memo to brokers, Penn Mutual said it expects "to revisit these and other changes as we gain better insight into the impact of the Covid-19 pandemic."
Among those prompted to move quickly amid the changes was David Hungerford, 72 years old, who bought a $1 million policy from Prudential Financial Inc. last month.
Mr. Hungerford, an owner of a package-design company in southern California, said his broker advised him to act fast because of looming premium hikes. Calling life-insurance buyers "collateral damage" of ultralow interest rates, he said he hustled to wrap up a medical exam.
"I was concerned about my overall bucket of assets in the stock market, and I wanted another bucket to depend on" for his wife's financial protection, he said about his desire to purchase the policy.
Prudential, the nation's biggest life insurer by assets, told brokers in a March missive that its late-April rate increases of 8% to 12% on the type of policy bought by Mr. Hungerford, and other actions, "put us in a much better position to withstand the low interest-rate environment."
The insurer also temporarily suspended sales of 30-year "term-life" policies, an offering popular with young families, a spokeswoman confirmed. Such policies provide a basic death benefit during the years in which they rear their children. Prudential also reduced the amount of interest it is crediting to certain combination savings-and-death-benefit "universal life" policies.
Typically, life insurers hold about 70% of their general investment account in long-term bonds. In general, the yields on these holdings, many of them corporate securities, follow the 10-year U.S. Treasury. Its annual yield has been mostly declining since the 1980s, when it peaked at nearly 16%.
The yield dove after the 2008-09 financial crisis and was as low as 1.366% in 2016 before rebounding to about 3% in 2018. In March, it plummeted again as coronavirus sparked a rush to safer assets and investors feared interest-rate cuts from the Federal Reserve.