As interest rates rise, life insurance providers have some decisions to make. Insurers can increase short term profits. But they also have ample opportunity to lose policyholders to the competition. The fastest and most aggressive to make product adjustments may gain market share. But they may miss their window to take advantage of greater profit margins in the short term.

Not all insurers will benefit from this environment equally. Insurers must choose the right products to emphasize. They must also strike the right balance between maximizing their margins and keeping pace with the competition.

The Lay of the Land

Inflation has been persistent in 2022 and reached a four-decade high in June. To curb inflation the Fed raised interest rates four times in less than five months. The two most recent increases were 75 basis points, the largest rate hikes since 1994.

In other words, this type of environment is new for a lot of us.

Last month we reported the effect rising interest rates have had on annuity sales. Many of the same principles apply to life insurance. Particularly whole life and fixed universal life (UL), which rely on long term asset yields. Higher interest rates mean generally increased returns on insurers’ investment portfolios. These gains are typically passed on to the consumer in the form of decreased charges or increased returns, such as an improvement in declared interest rates.

The economic outlook likewise influences life insurance sales. Once again, products like whole life and UL stand to benefit in times of economic uncertainty. In a teetering economy, buyers tend to avoid products tied to market performance. They typically start to steer clear of products such as indexed or variable life insurance and opt for products with less risky returns.

Bringing Balance to the In-Force

The rising interest rate dynamic creates a bit of a prisoner’s dilemma for insurers. Carriers can enjoy higher profit margins if they keep their product assumptions static. As their own portfolios improve with new investments, existing products offer better margins. Some insurers, however, will be quick to adjust to the changing market with declared interest rate changes or new and updated product features. This may allow them to increase sales and gain new market share.

Making these changes right away is not an option for most carriers. Insurers must wait for existing investments to expire to free up funds for new, higher-yielding ones. The carriers lightest on their feet can make this transition the soonest.

To be the most successful in coming months, insurers must both maintain in-force policies and maximize profit margins. It’s a tricky note to hit. Your response should be nuanced and catered to your various life products.

A Matter of Emphasis

Insurers should know which products to tweak for optimal profit. They should anticipate which will see the greatest demand as interest rates continue to rise.

The products least affected by rising interest rates will be traditional products like term life insurance that do not have an investment component.

Whole life policies are a different story. Whole life will face competition as other insurers begin to offer products with more attractive returns and improved benefits. You may find you need to take steps to maintain your most profitable product portfolios, such as implementing an active retention program. You should also ensure it is easy for your clients to conduct business with you. Some carriers use a digital post-issue solution to make it simple for customers to request policy changes and updates. Moving forward, you will need to adjust new whole life products to be more competitive as new money products from competitors hit the market.

You have additional options for keeping current policyholders happy with products like UL. Adjusting credited interest rates can help you manage retention. Raising crediting rates increases your costs, but it may be worth it to prevent the revenue loss of surrendered or lapsed policies.

It also pays to anticipate which product types will be in demand in coming months. As the U.S. faced two consecutive quarters of negative GDP growth, consumers are losing their appetite for risk. It may be wise to emphasize products that are not tied to equity performance. Indexed or variable life products are not attractive if the market is in decline—or even if buyers fear it soon will be.