Life Insurer Crisis Unfolding

Years of near-zero interest rates are resulting in a crisis for life insurance and long-term care insurance companies. They are facing the challenge of how to fund policies that were sold at a time when actuaries couldn’t foresee a world with interest rates below 8 percent, and now can’t envision a world with interest rates much above zero or 1 percent.

Low interest rates have affected life insurers’ earnings. As a result, people who bought universal life policies in the 1980s and 1990s—some that guaranteed annual returns of 4 percent or more—are experiencing a sharp rise in their premiums, triggering about a dozen lawsuits against insurers.

The Federal Reserve has raised short-term interest rates over the last year, but yields in the bond market have remained low. This has had a detrimental impact on life insurers. More than three-quarters of the industry’s $6.4 trillion in invested assets is in bonds.

When an 8 percent bond from the 1990s matures, the funds must be reinvested, but many bonds today only pay about 2 percent—about half of the guaranteed return of 4 percent for insurance policies sold to people several decades ago.

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