Here’s another cost.
Life-insurance companies are scouring their policies to identify ways to raise rates and fees and lower the amount of interest they have to pay on savings products as low interest rates cut into their profits.
The bottom line for policyholders is they have to pay up or relinquish benefits.
The main culprit: the Federal Reserve’s seven-year-old campaign to boost the economy. Life insurers earn much of their profit by investing customers’ premiums in bonds until claims come due. They have typically favored high-quality, long-term corporate bonds to meet regulatory requirements to back their obligations with safe investments. As the Fed began driving down rates in 2008 to rescue the economy from a global meltdown, the yield on corporate bonds has tumbled.
It isn’t just widows and orphans, and anyone else forced by circumstance into fixed-income devices for their money who are harmed by the Fed’s interest rate suppression; it’s everyone.
A concrete example is a retired school teacher who’s a long-term care policy holder. Because of the Fed’s shenanigans, her insurer had to offer her, consistent with the above cite, a lower payout in return for keeping her annual premium fixed at $4,000. Those $4k might seem like a lot or a little, but here’s how an interest rate regime might impact that premium.
In the first place, a market interest rate regime, instead of the Fed’s suppressed rates, likely would have let the insurer leave the terms of this policy holder’s contract intact.
In the second place, a market rate of return for the policy holder’s savings/investment money—let’s say she could get 5% in a free market—would require a savings size of just $80,000 to throw off enough income to cover her premium. At today’s deliberately low rate of around 2%, she needs savings of $250,000 to get the income to cover her premium.
It’s time for the Fed to get out of the way of the market and to return to its knitting: maintaining price stability—a steady inflation rate—and full employment (which it doesn’t need to do directly, as that falls out of a steady inflation rate). And that steady inflation rate itself demands the Fed at least rraise its benchmark rates to levels consistent with its own target of 2% inflation.