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Low Interest Rates are Here for a Long Time

There are many discussions going on about interest rates and their trends. This month I want to give you the perspective from the insurance industry. In our opinion, very low interest rates are here for a very long time.

LTD Rates increasing substantially with Minimum Claims.

Insurance companies are required to set up reserves to pay long term LTD claims. One of the factors in calculating reserves are interest rates to age 65 for a claimant. Using a factor of 1% instead of 6% makes a substantial difference in reserve requirements. Insurance companies don't see a long term change in rates so they have started increasing LTD pricing.

Almost All Insurance Companies have Stopped Selling Annuities

When people want a lifetime or long term periodic payment from a settlement or retirement allowance, they have traditionally purchased an annuity from an insurance company. The insurance companies can no longer use a long term factor of even a 4% return and they are not attracting much business. Because the long term pricing is almost impossible, they have simply stopped offering annuities.

Discontinuing of Life and Term Products

Many insurance companies have stopped selling Term to 100, Universal Life plans etc, because they can't figure long term pricing and remain competitive. Interest rates help determine product pricing. Rather than making a financial mistake, many companies have just withdrawn from that sector of the marketplace.

Summary

Insurance companies traditionally invest their policyholder premiums in long term bonds, conservative stocks, commercial real estate, etc. For years the insurance industry has used long term return rates ranging from 5%-8%. That can't be done anymore. Even though interest rates have been low for a few years, the insurance industry is no longer able to absorb the losses, thus they are making the appropriate product and pricing adjustments.

My almost 30 years in the industry has me convinced that low interest rates and slow growth will be here for a very long time.

We hope everyone has a safe and enjoyable summer.

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