Over the last 10 to 15 years, both the expense and mortality costs for life insurance policies have dropped. The mergers and acquisitions within the life insurance marketplace have affected expenses within the policy, which includes all of the costs of issuing a policy. This has created a much more efficient marketplace, as technology and economies of scale reduce the costs of doing business. Commissions to the agent have been reduced as life insurance manufacturers compete in a more competitive marketplace.
Furthermore, demutualization, in which a life insurance carrier changes from a mutual company (owned by the policyholders) to a stock company (owned by the shareholders) has created more efficient policies for two reasons: (1) Demutualization opens up the capital market for the carrier to expand and acquire other companies; (2) Once it becomes a stock company, the carrier is forced to become more competitive since it must answer to stockholders.
Mortality charges have dropped yearly as medical improvements and better health habits contribute to a longer life for most Americans. An article in Trusts and Estates magazine reported a 1998 study showing that in 75% of trust policies that were at least five years old, the death benefit could be increased by 40% without any increase in premium payments. The lower mortality costs resulted in more efficient policies. We continue to see this today. Additionally, changes in interest rates affect the longevity of your universal life insurance policy as well.
How are the expense and mortality gains reflected in existing life insurance policies?
Permanent life insurance policies are issued with the expectation that the policy will use the current insurance costs, including mortality expenses. Improvements to the mortality costs in the life insurance marketplace are typically not reflected in existing policies but may be in newer policies, as the carriers introduce new products. So, the gains that can be seen in the marketplace may or may not be reflected in the policies owned by existing policyholders. Because of the competitive nature of the marketplace, many insurers use the gains that are created to lower costs on new policies.