How the Coronavirus Affects Life Insurance Policies
Three months ago, you wouldn’t have cared much about having only one roll of toilet paper in the house. But today, the sight of that single roll under the bathroom sink could inspire a panic attack. This is the new normal for life in the U.S., thanks to the coronavirus pandemic. Everyday life has changed, and in a big way.
The thing is, those changes don’t stop at the basics. Yes, toilet paper is hard to come by and there’s no telling when you’ll be able to eat in a restaurant again. But the pandemic is also causing economic turmoil, driving changes in the stock markets, interest rates, and the insurance industry. Obviously, your portfolio has been hit hard by the turbulent financial markets. As well, your life insurance policy — or the prospect of getting one — may look very different as the U.S. pandemic response evolves.
How the coronavirus affects existing life insurance policies
The good news is, COVID-19 doesn’t change your death benefit. Insurers can’t alter coverages or add exclusions to your existing life insurance policy. Life insurance in the U.S. doesn’t normally exclude causes of death related to pandemic — and the insurance company cannot add that exclusion after the fact.
If you contract COVID-19 and pass away, your insurer has no basis on which to deny that death benefit claim. And, hypothetically speaking, that’s true even if you get sick after violating stay-at-home orders or travel bans.
Slower cash-value growth
Though your death benefit remains intact, other aspects of your life insurance policy will change in the months ahead. These changes are related to the government’s efforts to soften the economic blow of COVID-19. On March 16, 2020, the Federal Reserve lowered its benchmark interest rate to 0% — an attempt to bolster economic activity by reducing the cost of borrowing.
Unfortunately, there’s a downside here. Lower interest rates reduce the earnings power of your cash value. As a result, you will probably see smaller dividend payments on whole life insurance, and slower cash-value growth in all types of permanent life insurance.
Cash-value declines in variable life policies
Variable life insurance invests your cash value in funds, many of which are tied to the stock market. That gives you a nice opportunity for growth when the market is up, as it was in 2019. But when the market is down, your cash value will reflect that performance, too.
If you do hold variable life insurance, take a look at how your cash value is invested and how it’s performed so far this year. Make sure you’re comfortable with the risk level you’re taking on. Know that if your cash value declines too much, you may have to increase your premium payments temporarily to keep your policy in force.
Deferrals on premium payments
Admittedly, any increase to your insurance premiums, even if temporary, may be tough to absorb right now. A March poll by NPR, PBS NewsHour, and Marist indicates that 18% of adults have either been laid off or had their hours cut as businesses close their doors to contain the spread of COVID-19.
If there’s a bright spot, it’s that insurers know you could be struggling financially. Some life insurers have already announced relief efforts to help you keep your policies active through this difficult time. New York Life has paused life insurance cancellations due to non-payment in several states until June 23, 2020. This applies to policy owners who’ve made at least one full premium payment, and to policies issued before March 24, 2020. Northwestern Mutual is offering 60-day premium payment deferrals for policyholders who are experiencing a financial hardship due to COVID-19.
Other insurers, including State Farm and Guardian Life, encourage struggling policyholders to call in and discuss the options. That’s a good strategy no matter who carries your life insurance — reach out to your insurer if it looks like you won’t have the cash to pay that premium. See if you can negotiate a grace period or payment deferral.
If you can’t make a deal with your insurer, you’ll have to surrender or sell the policy. Selling will generate more cash, but not every policy can be sold. Before you let that policy go, reach out to Harbor Life Settlements for a free policy valuation — just so you don’t accidentally leave money on the table.
How the coronavirus affects new life insurance policies
Longer-term effects of the coronavirus on life insurance are still unknown. Historically low interest rates and stock market volatility not only affect your cash value, but they also chip away at insurers’ overall financial strength. Plus, as the COVID-19 death toll rises, more benefits will be paid out. From those factors, we can guess that life insurance premiums will rise, as insurers will want to add more stability to their operations. We might even see insurers start adding pandemic disease as a standard exception.
In the immediate term, the coronavirus is already changing the way new life insurance applications are being handled. If you’re in the market for a new policy, here’s what to expect during the application process.
You’ll be asked more questions
Life insurance applications normally ask a lot of questions, but insurers are adding even more queries amid the pandemic. Expect to field questions about:
- Your recent travel history. It’s not new for a prospective life insurer to inquire about recent travel. Before the coronavirus pandemic, insurers wanted to make sure you hadn’t visited any high-risk regions like Afghanistan or Somalia. Today, life insurers will be concerned about any travel you’ve done, both internationally and domestically.
- Known exposure to COVID-19. This shouldn’t surprise you, but insurers will also ask you directly if you’ve had any exposure to the novel coronavirus.
- Any recent fever or respiratory issues. You’ll be asked if you’ve recently had any cold- and flu-like symptoms. Any admissions on your part to a fever or cough will prompt more clarifying questions. More importantly, your temporary symptoms might lead to higher premiums, even if those symptoms are unrelated to COVID-19.
Your application might be postponed
Even in the absence of respiratory symptoms, the insurer may decide to postpone your application for 30 days. This is most likely to happen if you’ve traveled recently or if the insurer has any reason to worry that you might have been exposed to COVID-19. A delay allows the insurer to see how your health develops before quoting your premium or offering coverage.
Misrepresentation is cause for policy termination
You might be wondering if you can “forget” to mention your Italy trip, or the weekend you spent in New York. The answer is no. You have to certify that the information on your life insurance application is accurate, and you may have to confirm those responses again prior to policy issuance. Misrepresentation at any point in the process is considered fraud. It’s also basis for the insurance company to deny your death benefit later.
Uncertainties around medical exams
Normally, the traditional life insurance application process includes a medical exam. The purpose is to validate your questionnaire responses and gauge your overall health. During the exam, a practitioner records your height, weight, blood pressure, and pulse. You’d also give blood and urine samples.
Pre-pandemic, this exam would happen in your home with a mobile medical technician. This format is problematic today, because it violates social distancing guidelines. How insurers will work around this going forward is still unclear. Some insurers have simply loosened the requirements on mandatory medical exams. One insurer is skipping the medical exam part of the process but charging policyholders higher premiums. Once the world returns to normal, the policyholder then has the option to complete the medical exam. If those exam results later justify a lower premium, the insurer will refund any overpayments.
No-exam life insurance
Of course, there are forms of life insurance that don’t require medical exams, such as simplified universal life insurance and guaranteed issue life insurance. Both are more expensive than traditional permanent life coverage. Simplified universal life insurance is risky for insurers and may be increasingly hard to get — particularly if the pandemic shows no signs of slowing down.
Guaranteed issue life insurance with a graded benefit should still be an option if you absolutely need the coverage and can’t arrange for a medical exam. The graded death benefit is essentially a waiting period after policy issuance, during which no death benefit would be paid. That time period is usually two or three years.
Watch cash values on existing policies; be patient with new applications
We’re still early in the process of defining the new normal in the wake of COVID-19. The first order of business is to secure that toilet paper. Then, check in on the cash value in your permanent life policies. Be prepared to put in more cash to keep your coverage in force. If you don’t have the money, reach out to your insurer and try to negotiate a financial hardship payment deferral.
If you want to obtain new life insurance, be patient with the process and upfront about your health and travel history. You can expect insurers to be cautious, which translates to a long underwriting process and, possibly, higher premiums. You may decide to delay your application voluntarily until things calm down, or your insurer may make that decision for you. However it plays out, stay healthy and take care of yourself — that’s the most productive strategy for keeping your life insurance options open going forward.