Life Insurers Just Got Whacked with a Big Expense…and we Didn’t Even Notice

In 2020, something a bit unusual happened.  Life insurers faced a huge expense that far exceeded expectations had you asked any stakeholder for his/her projection from the vantage point of 2019.  This huge expense?  A dramatic rise in death benefit claims.  Yup, it's true.  2020 saw a sharp–15.4% year-over-year increase to be exact–rise in death benefit claims.  This is the largest year-over-year increase the industry has experienced since the early 1900s during–you guessed it–another Pandemic.

So what are the consequences of this jolting rise in death claims?  And industry now teetering on bankruptcy and financial fallout?  Nope.  Not even close.  In fact, this news story is so unnewsworthy it didn't even catch the attention of major media outlets.  Now had we experienced a major life insurer failure…maybe just maybe our good friends at Fit to Print Inc. would have delighted in an opportunity to talk about life insurance.

But unfortunately for the resiliency of the life insurance industry makes for boring news.  Good news for those of us who place a financial stake in the presumed success of life insurers.

In case you're wondering, in 2020, the life insurance industry paid out a combined $90.429 billion in claims.  That's up from the $70.358 billion total paid in 2019.  This information comes to us from the American Council of Life Insurers (ACLI)'s 2021 Life Insurers Factbook.  Using data compiled from the National Association of Insurance Commissioners, the ACLI compiles a lot of data on life insurers each year and produces a report that looks at captivating data points such as how much money did life insurers spend on employee welfare benefits, and what state had the highest number of policies issued in it for the calendar year.

The Industry Makes a Promise and Keeps that Promise

Life insurers make an astonishing promise to the people who choose to do business with them.  They guarantee the payment of money in the event of death that is critically needed by families during what is often one of the darkest moments they will face.  It's no secret that life insurers have not operated within the most favorable conditions during the past decade.  With constant low-interest rates, insurers have been forced into riskier investment options than preferable while lowering non-guaranteed features of insurance contracts.

Despite this considerable headwind, the industry continues to innovate and bring products to market that compete fiercely with appropriately matched financial tools.

A sharp rise in claims seems like an almost insurmountable curveball that could rattle an already stressed industry.  Instead, the industry met the challenges of low-interest rates and an unplanned spike in claims and motored on.  Looking at financial data for a range of different insurance companies shows no trend among large, small, highly-rated, or poorly-rated hinting at stresses arising from this jump in claims.

The industry built itself around the ability to deliver on this major contractual promise, and we've now seen evidence that it can weather a major storm.

Whole Life Dividend Changes were Pretty Unremarkable Heading into 2022

The dividend announcements made for 2022 were very boring, to put it mildly.  So much so that we skipped covering them for the first time ever–we've had a lot going on this year.  Every mutual insurer is well aware of the claims increase and has likely experienced it to varying degrees.  Despite this, we didn't see any significant change in dividends, nor any indication that we need to worry about what this spike in claims might do to the company in the future.

Additionally, the changes announced about non-participating cash accumulation products were pretty unremarkable this year as well.

We've Always Had Faith in This

We've certainly expressed our dislike for certain companies for an array of reasons over the years.  We've also noted in all of those discussions that we never doubted those companies' abilities to do what they promised to do in terms of paying claims.

We even recently witnessed first-hand one company making good on the claims promise for which we had some serious concerns.

We spend a lot of time focusing on companies through the lens of cash value accumulation.  And we harshly criticize companies for their ability–or inability–to produce products that excel at this.  But accumulating cash value isn't the only–not even the primary–thing that life insurance contracts were designed to do.

Life insurance contracts were designed to be a financial safety net.  A reliable shield in some of the toughest of times.  And life insurers have proven themselves worthy of the task.


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