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Why Life Insurance Rates are Increasing and That is Good News!

The item that has benefited everyone over the last few years has finally caught up to the insurance industry. Low interest rates.

Insurance companies establish their pricing based on 1) Mortality, the number of people dying per year in a given age group, 2) Expenses, the costs of running the business, and 3) Investment returns. Traditionally insurance companies have been very conservative and invested in long term bonds, good dividend paying stocks and treasury bills. They always worked on a long term average rate of return of 4%-6% and that is why the life insurance industry in Canada and has been so solid, always a conservative approach.

The insurance business used to take a bit of a knock from the investment community when GIC's etc were paying 8%-10% returns. Boy, that 4%-6% is looking pretty good right now isn't it. The long term investments that the insurance companies are holding continue to mature and the question is where to put that maturing investment. The choices with low risk are limited, and the returns are very low. It appears that the insurance industry expects long term rates to remain low by the fact that most have or are moving to increase their pricing.

Most insurance companies are maintaining their costs and people are actually living longer. The problem is, with no long term changes in investment return on the horison, prices must go up.

In the last 3 months we have seen a number of insurance companies raise their pricing and have been advised that other companies are increasing prices effective April 1, 2012. This is actually good news to consumers as it tends to confirm what most of us have suspected for a long time, "low interest rates will be around for a long time". That of course is a benefit as Canadians owe more on mortgages, lines of credit, credit cards etc, than they ever have in history.