Interest rate creep puts life on the line

Market move fast and their movements can undermine the best-laid plans.

While shooting the breeze with insurance types, the idea came up that the mathematics behind many life insurance decisions has been undermined by the collapse of interest rates.

And things could get worse, with some speculation among investment bankers that bank term deposit rates are set to fall further.

With the developed world in a poor state, interest rates have been brought low, and brought low for the foreseeable future.

Everyone is probably aware of people whose spending power or retirement plans have been upset by the loss of money, but no thought has been given to the stunningly poor return on income-producing assets that would be got from investing the proceeds of a life insurance policy.

There are many ways people choose the sum they insure their lives for. Some opt to cover their mortgage, thinking not very much about how their loved ones would cope if they were suddenly removed from the scene.

For those with no dependents, the choice is often to cover just the cost of their funeral.

Others choose a sum large enough to be invested and to generate a return to allow their families to cope for an extended period without them. Others still select a sum that is large enough to clear the mortgage and allow their family to get by for a few years - long enough, for instance, to get the kids into an education track, and their remaining other half into full-time employment.

The collapse in interest rates is an expression of a tremendous expansion in the printing of money by Western governments seeking to make their debts affordable and to give impetus to their ailing economies.

Whatever the cause, that should be considered by this latter group of insurance buyers.

In theory, a decrease in the income a person could expect to produce would lead to them upping the amount of life cover they have.

Now, this may sound to you rather like the kind of idea that insurance marketers might suggest as a reason for people reviewing their insurance with a view to selling more of it, but it is a valid point.

Needless to say, with the focus on staying solvent and reducing spending, widespread increases in life insurance have not been happening, according to life industry statistics released by the Financial Services Council last week.

Life insurance cover hasn't rocketed up. In fact, it's creeping up quite slowly, crunched in all likelihood by rising house insurance costs, decreased disposable income and everyone's rush to pay off their debts.

The truth is that people have little choice but to cut their cloth to suit their circumstances, and paying to increase your life cover by a third is not high on most people's agendas or even possible for most.

It's like people who are forced into retirement at a point at which markets have crashed. They have a smaller nest egg to live off, and a lessened risk tolerance.

At least they have the option to tuck their necks in, and possibly find a bit of part-time work to top-up their retirement income.

All life insurance holders can do is cross their fingers and drive more carefully.

Sunday Star Times