Here's What Insurers Are Doing to Make Up for Low-Interest-Rate Losses

Federal interest rates are hitting insurance companies hard, and here’s what these companies are doing about it.

Motley Fool Staff
Motley Fool Staff
Dec 11, 2015 at 2:33PM

Consumers may enjoy low interest rates -- at least when they are getting a loan or mortgage -- but they have hit a number of industries very hard. Insurance companies, in particular, have experienced severe damage to their investments, and as a result, have taken drastic measures to recoup some of those losses.

How will these insurers survive in the midst of historically low federal interest rates? Will raising their prices bring them fewer customers?

A full transcript follows the video.


This podcast was recorded on Dec. 7, 2015.

Gaby Lapera: There was another article that we actually saw on the Wall Street Journal that some insurers are actually raising rates on life insurance policies that they sold back in the '80s. And this is for a special type of insurance called universal life insurance, which is kind of like a combo life insurance slash savings account-type deal, and has tax advantages on it. And this is really unusual.

Most of the time, insurers do not raise prices on customers, especially ones that they've had for so long, and the increase in price can be anywhere from -- they said the lowest was going to be, like, $150. But for people who have millions and millions and millions of dollars in these accounts, then it could be over six figures.

John Maxfield: Yeah, I mean, and this just goes to show that low interest rates don't only hit banks. I mean, insurers are just really, really struggling right now to make any money. And if they're not able to make money, I mean, they've got to adjust in some way, and evidently, raising rates on long-term existing customers -- it's gotten so dire that that's where they feel like they need to go.

Lapera: Absolutely. And let's back up a little bit and explain to people. So federal interest rates, like we've said many times before on this program, are extremely low right now. Historically low. They pretty much can't get any lower than they are. And the gossip mill, watercooler of the Fed is saying that eventually they'll probably raise them -- probably pretty soon.

Maxfield: Probably this month.

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Lapera: Probably this month which we've... I mean, we've said every month since June, I think.

Maxfield: Exactly. Since last June.

Lapera: But maybe, probably, this month. And when interest rates are this low, it means that insurance companies who are -- normally have these funds and kind of safe investments -- they can't make as much money on them. To the point that, apparently, they're starting to lose money, and they can't keep the investments up.

Maxfield: Yeah. This is just, and it's just a bad time for insurance companies, and it's a bad time for banks. And even if you're not even interested in investing in an insurance company because they are struggling to make money off their investment through their securities portfolios, because of these ridiculously low interest rates. But the angle to look at this from is not necessary just as an investor, but also as somebody who's looking for life insurance.

When interest rates are low like this, it's just going to, life insurance is just going to cost a lot more. So you can even think about life insurance from the perspective of kind of looking at it as a contrarian investor, and then to wait until actually purchasing it for yourself, or a large policy for yourself. Maybe buy an intermediate policy to get you, to buy you some years. And then buy your large policy -- wait until interest rates have gone up a little bit, and the price of those policies have gone down.