Rates on Some Term Life Insurance Products Soon to Skyrocket

By Jonathon D. Tudor, InsWeb.com

Americans are well aware that the struggling economy is affecting almost every aspect of their financial lives. From the stock market to home values to jobs-all are caught up in the same global quagmire of uncertainty.

But one financial issue that has yet to add to the fray is the cost of term life insurance. While some consumers are attempting to pay less for term life insurance by shopping around or decreasing coverage levels, they have not yet faced a drastic uptick in the basic costs.

That may soon change.

One of the largest life insurers in the country, American General Life Insurance Company, has recently announced that it will soon raise the cost of return-of-premium term life insurance as much as 50 percent. And many industry watchers believe other life insurance providers will soon follow.

Return-of-premium term life insurance is a specific type of term life insurance for which a consumer pays a markedly higher rate than with a traditional term life policy. But at the conclusion of the term-say, 20 years-the insurance company pays the policyholder back every dollar paid in premiums during that period.

With traditional term life insurance policies an individual pays an annual or monthly premium and that person's beneficiaries only receive money upon the death of the policyholder. With a return-of-premium policy, that individual enjoys similar death benefits as with regular term life, but if the policyholder survives the term he or she receives a refund of all paid premiums in a tax-free lump sum. For example, a 35-year-old woman who pays $500 a year on a 20-year return-of-premium policy will receive $10,000 at the end of the term.

What's in it for the insurance company? Simple-the premiums they collect can be invested. At the end of the policy term the company only returns the premiums, not the money they earned on them.

This simple fact is precisely why rates are increasing. In the current economic climate, insurance companies are simply not able to earn the returns on their invested assets that they have in the past. And that means that the only way they can continue to offer the product is to raise the premiums considerably.

One seller of return-of-premium policies, Matrix Direct, is communicating the coming American General rate increase openly in the hopes term life shoppers will purchase policies before rates go up.

"We're definitely using this opportunity to reach out to our customers and let them know a rate hike is coming on this very popular product," said Ron Harris, President, Matrix Direct, Inc. "AG ROP Select-a-Term is a solid term life protection product that offers policy owners the ability to have a cash benefit, equal to the basic premium cost, paid to them should they outlive the policy's coverage period-guaranteed. We anticipate many customers will want to lock in their rate now before the increase takes place in March."

Will regular term life insurance rates follow the return-of-premium upward trend? There's no way to know for sure. But the decline in the stock market and the abysmally low interest rate environment mean that insurance companies are facing an increasingly difficult challenge making money on their investable assets. If fortunes don't improve soon, they may be forced to consider rate increases.

What does this mean for consumers? If an individual is in the market for a return-of-premium term life insurance policy now, there's little question that he or she should consider purchasing one sooner rather than later. If that person is interested in regular term life or other insurance products, the best thing to do is to shop around and make sure to find the best rates available. Every insurance company is in a different financial situation, and it's very difficult to know how or when any one company will change prices in reaction to the current challenges.