The cost of life insurance has dropped around 10% in the last year, but cover this cheap won't be around for long.
I worked in the insurance industry up to 2005 in a variety of roles. At the time I left, life insurance prices had been falling for several years. Indeed, insurers were paying out more in claims than they received in premiums.
Since I left, despite a few small bounces, prices have continued to shrink, so that by my estimate prices are now the lowest they've been in at least seven years.
Last December I found life insurance prices picked up a few pence, although they remained extraordinarily cheap. Last year, a 30-year-old male non-smoker who wanted his dependants to receive £200,000 if he dies within the next 20 years would have paid just £11.06 a month fixed for the duration. Six insurers charged less than £12 a month.
Now, prices are almost 10% lower. Aviva charges just £10.05 a month for the same cover. Three insurers charge less than £11 a month and seven charge less than £12 a month.
Insurers make a loss on premiums
In 2007, for every £1.05 that insurers paid in life-insurance claims, they received just £1 in premiums. Yet life insurance costs are still falling...
Insurers are earning even less
Last year, according to Deloitte, the accountants, 26% of people were planning to cut down on their insurance costs. This year they say that 17% are going to do so. In total, if most of these people make the reductions they're talking about, that'll be a loss to the industry of around £2bn in premiums per year. Yet life insurance costs are still falling...
Insurers face more fraudulent claims
In desperate times more people submit fake claims. It's not too easy to submit a fake life insurance claim, as that would normally involve faking your own death. However, insurers will be taking substantial losses in other areas. The Association of British Insurers reckons it costs each person with insurance an average of £44 per year to pay for fraud. Yet life insurance costs are still falling...
Insurers losses are compounded by the stock market
The reason that insurers have been able to offer life insurance so cheaply - and seemingly at a loss - is that it reinvests the premiums it receives in the stock market. However, the markets have lost around a third of their value in the last year or so. Yet life insurance costs are still falling...
Prices defy belief
£2bn In lost premiums isn't a great deal in the scheme of things. Natural disasters often cost insurers a fair bit more. What's more, insurance is cross-subsidised, meaning that if prices are too low in one product then others can be priced higher to make up for it. However, the stock market losses are a serious consideration, as they'll have wiped out many, many more billions for the insurers.
Competition in insurance is intense, but insurance goes through cycles where competition heats up and forces prices ever lower till some insurers fail. Then insurers disappear or consolidate and we have a period of lower competition. We must be at or near such a turning point in the insurance cycle. Indeed, despite the cheapest policies getting cheaper, I have seen good evidence that the average cost has gone up, meaning some insurers are already too weak to compete at today's low prices.
Something's got to give
These ever lower prices cannot last. If you're interested in reducing the cost of your long-term insurance products such as life insurance, you should consider locking in the low prices now by getting a new quote.
You also shouldn't forget what I consider to be the most important long-term insurance: income protection.
> Compare life insurance through lovemoney.com.