Did Your Life Insurance Policy Die During the Recession?

Posted in Life Insurance

November 5th, 2009

Life insurance has been an insurance mainstay ever since the first policy was ever sold. It achieves two critical objectives: financial protection for your dependents in the event of your death, and retirement savings for you in the likelihood that you live to a ripe old age. The current recession has changed the way people approach life insurance policies, however, and many have begun to question their worth in these dour times. While it’s a complicated topic, the bottom line suggests that most people still believe that life insurance remains a valid protection for dependents as well as a sound savings tool.

Life Insurance Safety Net

Life insurance, whether it be term life insurance, guaranteed life insurance, universal life insurance or any of its other most common variations, is financial protection for a policyholder’s dependents. For this simple yet critical reason life insurance is essentially recession-proof: Economic cycles will come and go, but death can always strike without warning. According to an April study commissioned by Prudential Insurance, two-thirds of Americans see life insurance as an important safety net. For those with dependents, having a robust life insurance policy makes as much sense as it always has. However, if a policyholder no longer has dependents – the kids are grown with families of their own, for instance – then paying monthly life insurance premiums probably doesn’t make sense anymore regardless of the economy.

People with universal life insurance or variable life insurance have felt the economic crisis as much as anyone else with money put into retirement funds. Both of these policies serve as investment vehicles by allowing policyholders to make payments over the cost of their premium, which is then invested in either stocks or bonds. Other insurance providers put their policyholders’ money into their own funds which earn interest rates tied to well-known investment indices, such as Moodys, or Standard & Poor. Interest earned on these investments can be put toward premium payments or can accrue. Either way, in 2008 the financial markets went into free-fall, and people everywhere saw their investments lose alarming amounts of money. No type of fund was safe, either: 401Ks, Roth IRAs, money market funds – all lost money when the economy began to nosedive.

Recession Hits Life Insurance

In response to the recession and its setbacks, some people with life insurance policies have canceled them because they can no longer afford them. When push comes to shove and it’s time to choose between food on the table or monthly life insurance premiums, immediate concerns always win out. Other people have switched from variable or universal policies to simple term or whole life insurance, which is cheaper and does not have an investment aspect.

Some people however, are focusing on the big picture and maintaining their policies. Some want to make sure there is money left over to cover funeral-related expenses. Others want to make sure a certain dependent, such as a spouse, will be cared for. Many have faith that the economy will rebound (there are already some signs that the worst may be over) and the markets will come back along with it. According to popular retirement website BoomerMarketAdvisor, that’s an across-the-board sentiment. When the markets come back the profits come back, and their investments pay off. As ever, the bottom line is that maintaining life insurance and assessing its relevance is going to be up to the individual’s priorities.