The Impact of COVID-19 on Purchasing Life Insurance

A look at how the pandemic has shaped consumer behavior, policies, and providers

COVID-19 has affected consumers and nearly every aspect of our economy, and the life insurance industry and policy applicants are no exception. Before the crisis, the proportion of Americans holding policies had fallen from 63% in 2010 to just over 50% a decade later. But the sudden onset of a worldwide pandemic spurred “something of a renaissance” in the industry, with younger adults, in particular, “panic buying” policies.

Rates and payouts have remained fairly stable, and the application process has been expedited in the age of COVID-19. But all is not well with life insurance industry profits. The increased revenue seen by some insurance companies is offset by significant risks, including actuarial uncertainty and the economic volatility affecting the investments that back insurance and annuities.

Is the current situation a buying opportunity for individuals shopping for life insurance? We think so, and prospective life insurance buyers need to pay attention. Let’s look at how COVID-19 has changed the industry and whether these conditions will affect benefits and rates.

Rates, policies, and payouts have remained consistent in the face of demand, COVID-19 risks, and deaths

Many insurers reported a significant increase in policy applications since the pandemic took hold in spring. But despite 300,000–400,000 estimated excess deaths in the U.S. in 2020, life insurance rates and benefits have remained relatively consistent. 

“Despite the increase in mortality risk and significant uncertainty, we find limited evidence that life insurance companies increased premiums or decreased policy offerings due to COVID-19,” reports The National Bureau of Economic Research. Further, there was “no evidence of life insurers pulling out of the market” and “COVID-related claims [were] already being paid” in October.

Economic uncertainty drives potential risk for insurers

Despite the stability of the life insurance market, uncertainty is the bane of insurance companies. And 2020 has been a very uncertain year.

Profitability hinges on a provider’s ability to assess risk and mitigate it through rates, reinsurance, and the performance of investments. In addition, actuaries are still attempting to determine whether COVID-19’s impact will be severe enough to change broad assumptions about mortality, morbidity, and policy lapses, among other factors.

Market volatility impacts the return that firms see from both company investments and the life and annuity products they sell. Compounding this confusing environment is the need to comply with new regulations governing accounting and contracts, including the pending implementation of International Financial Reporting Standard 17.

The net effect of this fluid environment could be increased insurance premiums. But rates have thus far remained flat. 

S&P Global Ratings assesses that because of ultra-low interest rates, “the most significant source of risk” to the insurance industry overall “is the performance of investments” in the safe, fixed-income portfolios. 

If the economic downturn continues, however, the market could catch up with the pain felt by other elements of the economy, which could impact rates.

Social distancing resulted in underwriting adaptations and industry modernization

There were delays in obtaining policies when the pandemic began, as insurers struggled to adapt their application and underwriting processes. New applicants must now answer some additional questions regarding their health, including if they have been exposed to COVID-19 and whether they have underlying health conditions that put them at particular risk from the virus.

Individuals in high-risk groups may have difficulty getting a policy, pay more, and/or be subject to enhanced medical screening before an application is approved.

Susan Ghalili, the vice president and chief underwriter for John Hancock Insurance, writes that COVID-19 “social distancing and safety measures have made traditional steps in the sales process impractical, if not impossible.” Standard applications that usually took weeks or months and may have included in-person exams were not suited for issuing policies during a worldwide pandemic.

As a result, firms are leveraging data and technology to a far greater extent. More than “a quarter of U.S. life insurers … expanded their automated underwriting practices” at the onset of the pandemic, according to a survey conducted by the research firm LIMRA. Ghalili notes that accessing electronic health records and using HIPAA-compliant platforms that enable consumers to share data have reduced the underwriting period “from weeks to—in some instances—just minutes.”

And while insurers have added screening questions related to COVID-19, many have also either waived or postponed in-person medical screenings. Some of these revisions are likely to lapse once the pandemic subsides, but many technological changes and expedited underwriting processes will remain and increase efficiency.

The possible long-term implications of COVID on life insurance and benefits

A National Bureau of Economic Research working paper proposes three reasons that life insurance rates and offerings remained stable in 2020:

• “Life insurance premiums [already] account for the rise in mortality, unconditional on the infection.” Thus, underwriters’ assumptions remain reasonably accurate, and lockdowns and social distancing limited the potential increase in mortality.

• Individuals who are buying life insurance may have a different risk profile than those who have died from COVID-19. The analysts note that “40 percent of deaths nationwide are from those residing in nursing homes (NYT, 2020), individuals who almost certainly would be rejected if applying for a new term life insurance policy.”

• “Third, even sizable transitory increases in risk would reflect small increases in annual premiums as the price increase is spread over the term of the policy (e.g., 15 years).”

Nevertheless, future learnings on the impact on “long-haulers” who have recovered from the virus might impact future underwriting on applicants and potentially increase rates.  

At least one preliminary projection by Deloitte shows worldwide life premiums decreased by 6% in 2020, but they are expected to grow by 3% in 2021. 

As with many aspects of COVID-19, it’s hard to precisely project what we’ll see for life insurance in 2021. Much depends on the efficient deployment of vaccines and speedy economic recovery. But since life insurance rates and offerings have remained relatively stable, it is a good time for companies and individuals to evaluate offerings and lock in policies on favorable terms.

Karp HR Solutions can help you tailor a benefits program that meets the unique needs of your workforce and maximizes retention. To learn more, contact us today for a free consultation.