Why the people rushing to get life insurance now are doing a smart thing

The pandemic has revealed a big but fixable hole in our financial planning for emergencies.

It’s life insurance. All of a sudden, this unpleasant, often-ignored topic has got our attention.

At PolicyMe, applications for term life policies shot up 70 per cent from February to March and have more or less held onto that increase in April and May. “The need has always been there for insurance," said Andrew Ostro, co-founder and CEO of PolicyMe. “What the pandemic has done is open people’s minds about it.”

Term life insurance is what we’re talking about here. It’s the kind of insurance where you buy coverage for a set term and payout amount. When the term ends, you either get more insurance or let the policy drop.

You buy term if you have dependants who would suffer financially if you died. The reasons why people are thinking about term life right now are obvious. The reason why now is the time to buy term life is less so.

Mr. Ostro many insurance companies have not raised their premiums for term life coverage as of late May. It’s quite possible they will in the future.

A former actuary and insurance industry management consultant, Mr. Ostro explained that term life insurance premiums are influenced by the cost of running the business, mortality risk (how many people are dying) and investment returns on premiums set aside to pay future claims.

Those latter two factors are working against insurers right now. The pandemic has increased mortality rates, but the extent still hasn’t been determined. Interest rates are way down since the beginning of the year and not expected to increase significantly for quite a while.

Full-time employees often have a limited amount of life insurance included in their company’s benefits package. In the rash of layoffs caused by the pandemic, these workers may have lost their coverage, at least temporarily. Where it’s financially feasible, it makes sense for them to consider adding some term life coverage of their own to complement their work-based plan, or replace it if they never return to work.

Urine and blood tests were at one point commonly required for life insurance applications, but Mr. Ostro said the pandemic has accelerated a trend toward using these tests less. He said that while companies differ in their rules, you may not need a urine or blood test if your policy is for less than $2-million and you’re under the age of 50. If you’re between 50 and 60 years and your policy is for less than $1-million, you may likewise not need these tests.

The average amount of coverage chosen by PolicyMe customers under 40 has increased in the pandemic to a bit more than $600,000 from $550,000, while the overall average term has crept up close to 20 years. These trends help explain why the average premium paid by customers has increased by 17 per cent since the pandemic began. Also, the average age of clients is rising – just more than one-third today are 40 and older.

The insurance industry is full of helpful suggestions on how much coverage to get – 10 times your annual salary plus your mortgage balance and other debts is fairly common. Affordability takes precedence, though. Buy a policy with monthly or annual premiums you can carry so you’re not tempted to bail out later to save money.

The 20-year term life policies people are buying these days make good sense for the young families that need this coverage most (little children, big mortgages). You’ll face higher premiums if you renew the policy when it expires, but the amount of required coverage will be much less because your mortgage will be smaller or gone and your kids close to self-sufficiency.