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Why life insurance may suddenly become far more affordable

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In our last post, we discussed while those who make the decision to purchase life insurance must be commended for their foresight, they should know that there are scenarios in which insurance companies might attempt to avoid payment.

While the notion of an insurer seeking to deny policy payments might not come as too much of a surprise, what is actually surprising is the relatively large number of consumers who reject the possibility of securing life insurance via the private market offhand thinking that its simply too expensive.

Indeed, a recent study by two major insurance industry groups found that when consumers were asked to guess how much the annual premiums for a 20-year life insurance policy in the amount of $250,000 for a 30-year-old with no health issues would be, the average answer was roughly $400. This, however, is actually more than double the actual cost of such a term policy.

As discouraging as this reality is, the good news is that these misperceptions concerning the cost of life insurance -- particularly term -- may soon be a thing of the past thanks to the passage of new regulations in a majority of the states.

What are these new regulations?

On January 1, new regulations took effect in the majority of the states calling for life insurance companies to adopt a new method for calculating how much money they have to keep in reserve known as "principle-based reserving."

Under the old system, which unbelievably dates back to the Civil War era, a standardized formula was used to determine how much money needed to be kept in reserve. Experts indicated that it resulted in reserves being far higher than necessary.

How is principle-based reserving different?

Principle-based reserving calls on life insurance companies to take a more customized approach, such that the amount of reserves needed for polices will be tied to each product and its accompanying risk level.

How does this benefit consumers?

Experts indicate that principle-based reserving means life insurance companies will likely have to set aside less money than before, meaning reduced costs for certain products and, by extension, the ability to pass on savings to consumers via lower premiums (spurred by competition) or expanded product offerings.

Are there any states that have declined to adopt principle-based reserving?

At the moment, it appears as if the states that have declined to adopt principle-based reserving, the product of decade-long efforts by the National Association of Insurance Commissioners, include only Alaska and Massachusetts.

Source: NerdWallet, "New rules could mean lower life insurance rates," Barbara Marquand, March 6, 2017

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