What Will Be Changing in Life Insurance for 2021?

Aug 25, 2021 | Personal Insurance

The pandemic and new administration caused major changes in life insurance. With COVID-19 and new administration laws all over the news, many people are wondering what will be changing in life insurance for 2021? COVID-19 caused changes in the buying and selling of insurances, particularly life insurances. Biden’s administration also brought changes in income tax and tax exemptions. These changes significantly influenced the buying, selling, and benefits of life insurances. 

Benefits of Life Insurance

Life insurance is like a fruit-bearing tree. It bears fruit at the time you need it. Unlike trees, life insurance bears different types of fruits. It comes in various types to meet the goals of policyholders. Life insurance has many benefits, depending on the purpose of life insurance. 

  • Financial Security

Death and end-of-life expenses always come unexpected and inconvenient. Having life insurance provides guaranteed financial security for your family in case of your sudden demise. A life insurer will provide the death benefit to your beneficiary. The death benefits will help your family to cover the costs of the following:

  • Unsettled liabilities like mortgages, loans, and credit card balances
  • End of life expenses and funeral costs
  • Living expenses of the remaining family members
  • Education of children
  • Wealth Creation

There are different types of life insurance depending on the customer’s goals. Permanent life insurance offers opportunities to build wealth. It has a cash value component that you can take advantage of while you are still alive.

  • Tax Savings

Life insurance policy owners receive favorable tax treatment. Death benefits are tax-free while accumulated cash value has tax-deferred growth.

  • Retirement Savings 

Some types of permanent life insurance policies have a cash value feature. The cash value accumulates over time. You can use the accumulated cash as retirement savings.

Effects of COVID-19 in Life Insurance

This pandemic taught everyone about the importance of life insurance the hard way. Sadly, more than 600,000 Americans unexpectedly died due to Coronavirus. Sudden death can bring financial difficulties to the bereaved family. COVID-19 truly proved the value of life insurance in these trying times. As the Coronavirus spread, it also spread awareness of the need for life insurance. According to Life Happens, a life insurance industry group, 31% of American consumers are eager to get life insurance because of this pandemic.

What Will Be Changing in Life Insurance for 2021?

Many changes happened in life insurance in the past year. The pandemic and new administration caused dramatic changes in the insurance industry. Insurers adopt changes to continuously provide coverage to consumers all over the world. 

Changes on Life Insurance Brought by COVID-19

  • Digital Access

This pandemic shut down most offices and stores. To continue protecting consumers, life insurers provide consumers with digital access. Digital access made applications, payments, and claims reporting more convenient and safe.

  • Accelerated Underwriting 

Due to lockdowns and social distancing, insurance companies accelerated their underwriting process. Before the pandemic, insurers include medical exams to estimate the applicant’s life expectancy. Because of the pandemic, most life insurance companies offer no medical exam policies. This is to speed up their underwriting process and continuously provide coverage to consumers. Instead of medical exams, insurers now use modern data modeling to estimate applicant’s life expectancy and premium rates. With this change, applying for life insurance coverage is now easier and faster. 

No Medical Exam Life Insurance Carriers
  • American International Group, Inc. (AIG)
  • Nationwide
  • Banner Life
  • MetLife
  • Increased Coverage Amount

Most insurers offer life insurance death benefits with the maximum coverage limit of $1 million. But during this pandemic, some insurance providers boosted their death benefit up to $3 million. This is good news for people who want to buy life insurance with higher coverage as they don’t have to deal with a lengthy underwriting process. Consumers now have more options when it comes to coverage limits. 

  • Lower Monthly Premium

Some life insurers now offer lower monthly premiums for consumers with low mortality risk for Covid-19. Younger adults without medical health conditions and who don’t smoke will now see lower rates offered compared to prior rates.

  • Increased Offering of Hybrid Life Insurance Policies

To meet the needs of consumers, many insurance carriers offer hybrid life insurance policies. Hybrid life insurance is a new policy that provides long-term care and death benefits. Nationwide offers a no-lapse guarantee universal life insurance with a long-term care rider. 

Types of Life Insurance Policies

Getting life insurance in 2021 has never been this easy. It is so easy you can easily get life insurance using your smartphones. Consumers can choose the type of life insurance policy based on their financial goals. 

  • Term Life Policies

This type of life insurance provides a specific coverage term. Consumers can choose from 10, 20, or 30 years depending on their financial plans and goals. Group life insurance is an example of term life policies. 

  • Whole Life or Permanent Life Policies

Permanent life policies provide lifetime coverage to consumers. It has a cash value feature where part of your monthly premium earns a minimum interest. Examples of permanent life policies are traditional whole life, universal, and indexed variables. 

Changes on Life Insurances Due to Low-interest Rates

The government created and passed the Consolidated Appropriations Act of 2021. This is to address economic problems caused by Covid-19. Covid-19 has caused the country’s historically low-interest rates. This bill made some changes in the internal revenue code 7702. These tax code changes have significant effects on life insurance products. To fully understand how this tax code changes impact life insurance products, let’s first review what IRS Code 7702 is all about.

IRS Tax Code Section 7702

Section 7702 of the IRS Tax code sets the requirements for insurance contracts to qualify as life insurance for tax purposes. Before the creation of section 7702, all life insurance policies have a tax-free advantage. To prevent people from taking advantage of this law, they created section 7702. They use Code 7702 to distinguish legitimate life insurance policies from investment vehicles acting as life insurance policies.

Requirements of Tax Code 7702

The federal government has set requirements to differentiate genuine life insurance policies from investment vehicles.  For a contract to qualify as life insurance, it must pass one of the two test requirements. Failure to pass either one of the tests will cause the income from the life insurance policy to be taxed as ordinary income. 

  • Cash Value Accumulation Test (CVAT)

The cash value surrender of the contract must never exceed the net single premium for the contract to pass the cash value accumulation test. The amount of cash value savings received by the policyholder in the case of cancellation shall not exceed the cost of a single lump sum policy. They used the minimum statutory interest rate of 4% to calculate the net single premium.

  • Guideline Premium and Corridor Test

This test requires that total life insurance premiums paid never exceed the recommended premium level at that time. The minimum statutory interest rate used to calculate the guideline single premium is 6%.

Changes to Section 7702 and its Effect on Life Insurance

This pandemic further exacerbates the country’s falling interest rates. As interest rates continuously go down, so do the investment’s earnings. This low-interest rate environment had caused economic problems, especially in the insurance industry. Life insurance companies earn through investing in corporate bonds, mortgages, and equities. The government lowered the interest rate assumptions in response to the country’s low-interest rates. These amendments will help life insurance companies continue providing guaranteed life insurance products to consumers. 

New Section 7702 Effects on Consumers

More than anyone, consumers are the ones who will greatly benefit from these changes in section 7702. The decrease in the statutory interest rate allows consumers to increase their premium limits. The higher the premium, the more cash value you can accumulate in your life insurance policy. Aside from the financial security it provides, life insurance will allow you to grow your money with tax deferral.

Effects of Biden’s Proposed Tax Reforms on Life Insurance

The new administration has proposed changes in the gift/estate tax exemptions. Currently, each American has gift/estate tax exemptions of $11.7 million. The proposed changes will lower down the gift tax exemptions to $3.5 million. President Biden proposed changes to tax exemption might take effect before the year 2021 ends. People with high net worth must take advantage of lifetime gift exemption while the changes haven’t taken effect yet. They can make large gifts by pre-funding life insurance trusts or making an additional gift to current life insurance trusts.

Act Now and Seize the Opportunity

There’s no perfect time to get life insurance but now. Even without the pandemic going on, life is still full of uncertainty. Life insurance will make sure you will leave your family with enough financial support upon your demise. With the changes to life insurance benefits, it’s a good idea to get life insurance while you still have the chance. Interest rates, tax exemptions, and underwriting procedures are subject to change at any time. As a result, consumers should seize this chance.

At AIS, we treat our clients like family. As a family, we want you to be financially secured without breaking your bank account. We partnered with insurance companies that provide affordable and efficient life insurance policies. Call us now, and we will help you get the best financial safety net to protect you and your loved ones.