COVID-19 is a major health concern that is causing quite the economic downfall. The impact of the economic downturn is already being felt in both new and in-force life insurance business. Major changes are expected in the coming months.

On the new business side, the decline in interest rates is making life insurance carriers rethink products with death benefit guarantees. Carriers are taking actions to limit large premiums, which was common after the Great Recession. Cap and participation rate declines are happening in both indexed life and annuity contracts. Interest rate declines are bound to follow on universal life products.

Underwriting for new business is being impacted as well. Carriers are creating cooling-off periods for applicants who have traveled to “hot zones” for COVID-19. Offers are likely to become less generous, because carriers don’t have a good way of knowing if an applicant is at risk or already infected.

The impact on carriers will vary based upon the claim experience and the product offerings. The market decline and volatility will impact carrier asset management fee income, hedging costs and options pricing for indexed products. If credit ratings for bond investments of carriers fall, it could require carriers to post additional collateral.

Carriers have also shifted more assets to higher risk or less liquid assets to get additional yields. Offsetting this is a carrier surplus that has been rising for many years, which will absorb some of the economic fallout.

Existing policyholders risk being caught unaware of changes to their policies. Interest rate declines will lower cash values, shorten coverage duration or require more premiums. Cap and participation rate declines will harm the performance of indexed products.

Those changes, if left unmonitored, could trigger a lapse risk although the timing will vary from policy to policy. Policies most at risk will be heavily loaned policies, term blends on whole life, single premium structures that weren’t guaranteed, and policies in late durations where the cost of insurance expenses will be increased due to cash value declines boosting the net amount at risk.

Clients may look to surrender life or annuity policies if they need cash in trying economic times. They may want policy loans or partial surrenders, may need to skip premiums for a while or want to reduce coverage amounts to lower the premium and may reallocate cash values to options with more perceived safety. Of course, there are ramifications to policies, carriers and policyholders from all these actions.

Agents will encounter significant challenges in 2020. There will be layoffs. Sales will decline due to social distancing, fear and clients focused on dwindling savings and risk of lost income. Some really good people will be put in very difficult financial positions. Amid the financial strain and uncertainty, clients will need more help than ever from agents.

Mike Pepe is founder & president of Proformex, a life insurance in force policy management software system.