Your Finance: Insurers' tough times will cost you

Commissions or "loads" are fees you pay a Commissions or "loads" are fees you pay a broker, adviser, banker or insurance salesman who sells you a mutual fund. These fees are paid in addition to the annual management fee. Photo Credit: iStock

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Nobody wants to feel sorry for life insurance companies.

Don't be so cynical. These are challenging times for the insurance industry. Company representatives meeting at an industry conference in Washington seemed downright gloomy, and were eager to tick off the troubles facing them.

Low interest rates mean insurers can't easily price or profit from the annuities they are selling. Bad and uninformed pricing decisions mean they may lose their shirts on some long-term care and annuity plans they sold years ago. Some companies are leaving markets they used to find profitable. And they are afraid that forthcoming tax reform will hit their products big-time.

You know what all that means: It's going to cost you. Here's how those industry challenges will hit your wallet and what to do about it.

Interest rates are low and staying there for a while. When an insurance company sells fixed annuities (which promise purchasers monthly income for life), it typically buys bonds to secure the income it's promised to deliver. But with 10-year Treasuries paying less than 2 percent in interest, it's hard to guarantee that long-term stream of income.

How that affects you: If you're thinking of locking up your money for long-term retirement income, be aware we're near a market bottom. Don't plunk down all the money you've set aside for annuities at once. Buy some now and some in a few years.

Mistakes were made in the long-term-care insurance field. Companies that jumped in early didn't really understand just how pervasive and expensive such care was going to be. They may not be able to afford the bill for a generation of chronically ill baby boomers. Some companies are raising premiums -- sometimes aggressively -- on existing policies. It's not unusual to see rate hikes of 20 percent or more.

How that affects you: You may worry about needing long-term-care insurance, but you may not be able to afford it. If you're convinced, based on your health and finances, that you do need this coverage, look for a plan that limits payouts to three or five years, is issued by a company that has a sizable business and a top rating, and that you could afford to keep even if premiums rise by 50 percent.

Old variable annuities were too generous. It's ironic that they had a bad reputation as consumer ripoffs because of their high fees. Their structures, which allow investors to invest in the stock market and still keep fat guaranteed returns, are proving to be costly to insurance companies.

How that affects you: If you own an older variable annuity, don't be surprised if you get a lump-sum offer. You'll probably have to take that to a smart adviser. Together you'll have to decide which is the better long-term outcome for you, based on your own factors. Just remember, there's a reason the company thinks it will save itself money by buying you out.

Tax breaks could disappear. The cash-value life insurance and annuities industries are built on the tax breaks that accrue to their policyholders. Money you earn within an insurance policy is typically tax-deferred or tax-free, depending on how the product is structured and how you access the benefits. If Washington reforms the income tax system in 2013, the value of insurance could suffer. Tax breaks for earnings inside of insurance policies could be limited for big policies or high-earning policyholders.

How it affects you: Unless you are in a stratospheric tax bracket, try not to let tax savings drive your insurance purchases; only buy products that make sense because you actually need insurance guarantees.

If you are in that elevated tax bracket, call your insurance adviser, because there's a good likelihood that whatever made sense for you last year or the year before will need to be adjusted. A change is going to come.

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