Life insurance now even cheaper!

The cost of life insurance has fallen dramatically recently, which means now is an extremely good time to get some!

Back in July I wrote that life insurance had reached its cheapest level in seven years. With insurers having a terrible couple of years I'd been expecting prices to rise since then, but to my surprise they didn't!

First, let's take a look at why should they have risen:

Terrible losses in the industry

There was a massive 27% fall in the value of life insurance premiums taken in 2008. (We just recently got the final figures for last year and will have to wait almost a year for 2009 figures.)

With the total take that year at less than £40bn, this is by far the biggest drop in more than ten years, which is likely a sign of many households tightening their belts. The amount we're spending on life insurance has been taken back to 2004/5 levels.

Meanwhile, payments to policyholders went up 10% to around £60bn, meaning insurers paid out over £20bn more than they received in premiums!

It's not unusual for there to be some sort of imbalance. Insurers often make a loss on life insurance. For the past few years they have typically paid out in claims around £1.10 for every £1 they've taken in premiums.

To use industry terminology, this gives life insurance a claims ratio of 110%. In 2008, however, at more than a £20bn loss, insurers paid a staggering £1.60 for every £1 it received in premiums, giving it a claims ratio of 160%. On top of this, insurers must pay wages, rent, lighting and so on.

Normally, insurers make up for these losses by investing premiums in the stock market. However, last year the stock market crashed more than 30%.

Altogether, 2008 was a terrible year for insurers.

No doubt life insurance premiums will have continued to fall this year, with early evidence that consumers will have cut back on around 15% of premiums. That's many more billions lost to insurers.

The industry is taking the hit

What normally happens during low-points in the insurance cycle like this is that the weakest insurers go out of business or pull out of the sector.

However, there's just been a modest decline, with the latest figures showing that just 18 businesses have either stopped selling life insurance and pensions or they've been bought out (presumably cheaply at a time of weakness) by stronger insurers.

That's just a 7% fall to 237 remaining businesses.

Either there is worse to come or life insurers are being managed extremely safely.

The insurance premium shock

After this period of consolidation, the next stage of the insurance cycle is usually to see premiums rise.

However, with just 18 relatively small insurers pulling out there's been surprisingly little change. What's even more astounding is that premiums have fallen yet further.

Since last December, premiums have fallen around 13% in the tests I've conducted.

A 30-year-old male who has never smoked and wants his dependants to receive £200,000 if he dies within the next 20 years need only now pay a fixed £9.67 per month, down from £11.06 per month last December. I found seven insurers that are now charging less than £12.

Looking for hidden changes?

This was a big surprise to me, so my first thought was that the small print must have been tinkered with.

However, reading through two of the cheapest contracts thoroughly I don't notice anything that looks worse than an average contract. Indeed, life insurance contracts are surprisingly straightforward, so they're harder to manipulate.

Nevertheless, in future articles on life insurance prices I shall be tracking changes in terms and conditions as well to be on the safe side.

What next?

After my years in the insurance industry and as a financial journalist, I still believe that life insurance prices will have to rise soon, because it will likely be a long time before the total premium take recovers to the highs of 2007 and, in the meantime, the losses will be hefty.

Expect fewer insurers by next year and a turn in the direction of prices.

Life insurance usually does what you want it to (that is, protect your family on your death) and at a good price. You should also look at what, for most people, is even more important than life insurance: income protection insurance.

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