Why are traditional insurers dropping out?
Today’s ultralow interest rates have made it much easier for ordinary Americans to save money by refinancing their mortgage or consolidating their debt, but they’ve also made life harder for insurance companies.
Insurers turn a profit by investing customers’ premiums, and they typically choose to invest heavily in bonds and other conservative options.
That’s because they have to ensure they never run low on cash. Imagine if a stock market crash drained their reserves right before a natural disaster caused a surge of insurance claims.
But in a low-interest-rate environment, those conservative investments don’t pay out like they used to, cutting into their profit margins.
In 2017, MetLife — one of the largest U.S. life insurers — stopped selling policies to individuals. Voya Financial, Allstate, Hartford Financial Services Group, Principal Financial Group and AIG and many others have all pulled back or pulled out entirely.
Why are people worried about new buyers?
Most of the new owners are private-equity firms, asset managers and hedge funds — entities known for making much, much riskier investments and not for their life insurance expertise.
Investment firms now own or control a total of 50 life insurance companies in the U.S., according to ratings firm A.M. Best.
These deals need to be approved by state insurance commissioners, who should protect your insurance policy from being sold to a company that doesn’t have the right resources.
Even so, “policyholders of acquired businesses often face private equity buyers that have weaker credit characteristics and greater risk appetites than the life insurers they originally transacted with, which might put them at a greater risk of loss,” says a recent report from the ratings firm Moody’s.
It’s not just a hypothetical danger: Four insurance companies in North Carolina have been in receivership since 2019 after a series of dubious investments. While customers’ life insurance claims are still being paid out, tens of thousands of people who bought annuities have been unable to access all of their funds.
The other concern is that these new owners will have no qualms about hiking your fees and premiums to the maximum allowed under your contract. Since some of the newcomers are just winding down old life insurance policies — and not selling new ones — they won’t have to worry about scaring off future customers.
How to find a safe, affordable insurer
Unfortunately, customers don’t get a say in how their insurer invests and whether their policy gets sold to a hedge fund.
But if you’re buying life insurance for the first time — or thinking of switching providers — you can make sure your new company is stable.
Organizations like Standard & Poor’s, A.M. Best and Moody’s rate the financial strength of companies. You may want to check their records or ask a potential insurer about their recent ratings.
And if you’re worried about companies jacking up your rates, it’s best to start off with the lowest premiums you can find. Try using a site that will allow you to compare quotes from numerous providers at once.
There are still hundreds of options out there, and shopping around is one of the best ways to take back some measure of control.