Why Did My Life Insurance Premium Go Up?
Posted in Life Insurance last updated on February 19, 2021You’ve been paying your life insurance premiums for 10, 20, maybe even 30 years and now out of nowhere, your premiums have gone up. Way up.
What the heck happened?
Are you a victim of a bait and switch? Is all that money paid out just gone now?
Do you pay the increased amount, go without insurance, or look for a new policy?
Going without life insurance is almost always a bad idea. So let’s answer the question, “Why did my life insurance premium go up?” and then figure out what to do about it.
QUICK GUIDE: Why did my life insurance premium go up?
Reason 2: You paid lower premiums
Reason 3: Your loan was unpaid
Reason 4: Unrealistic Interest rates
Your term expired
By far the most common reason for your life insurance premium to go up is your term expiring.
Term life insurance is popular because it is far less expensive than permanent insurance. Most people have term life insurance but there are still a lot of people who don’t understand how it works.
When you buy term life insurance, you are buying a death benefit for a specific period of time…a “term”. The most popular term lengths are 10, 20, and 30 years. As long as you continue paying your premiums, the coverage remains in force for the length of the term you chose. Your premiums will never increase and you death benefit will never decrease during that term.
When a term expires, the coverage is designed to end. You were covered for 10, 20, or 30 years and if you were to die during that time the death benefit would have been paid to your beneficiary.
Can you still keep it?
Buyers of life insurance wanted a way to keep their term policies longer in case they became sick and uninsurable at the end of their terms. Life insurance companies responded to this demand by offering to extend the term if the buyer chose to.
However this extension comes with a steep price increase every year the policy is kept.
So let’s now answer the question, “Why did my life insurance premium go up?” when it comes to term life insurance.
It’s because that’s exactly how it was designed. The problem here is not with the policy itself. Instead the problem is likely with the original agent not fully explaining details of term life insurance.
If the original agent explained the policy in a clear understandable way, you would be expecting the end of the term as well as the increase in premium. And you would be preparing for the policy’s replacement or termination.
You paid lower premiums
If you do not have a term life insurance policy, then you likely have permanent life insurance, what is called a Whole or Universal Life policy.
Unlike a term life policy, whole or universal life policies build up cash value during your younger years when the cost to insure your life is less. The cash value is then used later to pay for your insurance when you get older, allowing you to maintain a nice level premium payment.
Having cash inside your policy also allows you to lower your premium payments. While this flexibility seems like a good idea, it could catch up to you fast. Not paying the target premium now means there isn’t as much cash building up inside the policy to pay for the insurance in your later years.
That is when the trouble arrives in the form of an increased premium notice.
You’ll need to replace the cash that was not allowed to build during the time of lower payments.
Your loan was unpaid
Another seemingly attractive feature of While or Universal Life policies is the ability to take a loan against the cash value inside the policy. Again, this seems like a good idea.
But you’ve now got a problem, loans are meant to be paid back.
Just like reducing your premium payment, an unpaid loan means that there will not be enough cash inside the policy to pay for the premiums as you get older.
If you find yourself with an unpaid loan against your life insurance, you will eventually see your life insurance premium go up or lapse altogether.
Unrealistic Interest rates
The final answer to the question, “Why did my life insurance premiums go up?” is that you were expecting higher interest rates.
When selling Whole or Universal Life insurance, agents will provide you with an illustration. An illustration is a set of projections that will show how your policy may perform over the course of time. One of the major factors in estimating that performance is interest rates.
Two types.
There are two main interest rates you need to be aware of. The Guaranteed Interest Rate and the Non-Guaranteed Interest Rate.
Guaranteed interest rates are the bare minimum rates your cash will earn during the life of your policy, no matter what. Non-Guaranteed interest rates are nothing more than estimates, guesses, or even wishes. Insurance agents can enter just about any Non-Guaranteed rate into their illustration software.
Not. Good.
Reality vs. hope.
When presenting an illustration, professional insurance agents will show their clients the Guaranteed Rate and let them know they can rely on those numbers. Anything over that is a bonus. Overly eager, but probably well-meaning, agents will present the Non-Guaranteed Rate as if it is fact.
If you purchases a Whole Life policy from one of those overly eager agents, your may have been counting on phantom Non-Guaranteed rates. When those rate don’t work out the way you had hoped, the result is an increase in premium to keep the policy from lapsing.
Can it be fixed?
In most cases, yes. Here’s how.
1. Pay the new amount.
If your premium went up, the easiest way to keep your policy is to simply pay the increased amount due. That’s not what most people want to hear but it will solve the problem of your policy lapsing and keep your family protected.
If your increased premium is due to your term expiring, you can expect your premium to go up again next year. And the year after that. And again the year after that. In fact, it will keep going up every year because your rate is no longer guaranteed.
If your increased premium is due to you lowering your monthly payments in the past, it’s time to catch up. The increased bill is like a warning light in your car. Your policy is telling you that you haven’t maintained it properly and it’s about to break down. Without an influx if new cash
2. Repay your loan.
You wouldn’t go without repaying a bank loan, so why are you not repaying a loan from yourself. What do you have against you?
The initial illustration you were given showed a nice level life insurance premium for the rest of time. But that was based on you not taking any loans, or at least repaying them in a timely manner.
Now that your policy is in trouble, you owe it to yourself to pay yourself back.
3. Buy a new policy.
If you’re still in relatively good health, buying a new policy could be the best way to fix your newfound life insurance problem. You may even find a policy without having to go through a medical exam. It’s at least worth checking out to compare against what you currently have.
You may come to realize that the amount of coverage you bought 30 years ago doesn’t come close to paying for the new mortgage. Or, you may discover that you’ve done better than expected financially and you don’t need as much coverage. Either way, it’s time for a review.
If you still have some cash inside the policy, you could take that out and use it to go towards the new policy, further reducing your new premium.
Conclusion: Why did my life insurance premium go up?
There are four main reasons why your life insurance premium has gone up.
- Your term expired
- You stopped or lowered your premium payments
- You took out a policy loan and did not repay it
- Your agent showed you unrealistic interest rates
If you realize that your policy is in trouble due to one of these four reasons, not to worry. You can almost always solve these problems in one of 3 ways.
- Pay the new amount
- Repay the loan
- Buy a new policy
Before deciding on which of the three ways to solve your policy’s problem, make sure you talk to an independent life insurance agent. They can review your current policy, help you fix it, or find a replacement.
