There is still debate about whether or not we are heading towards a recession. Either way, we will soon find out, and we should be prepared for any scenario. For the life insurance industry, a recession is a particularly bad news. This has a lot to do with the consequences holders of life insurance policies face.

It is widely accepted that every adult earning a living should have a life insurance policy. Depending on their individual needs, they may get different types of life insurance. This usually comes in the form of a so-called rider, which is an add-on that places extra conditions and expectations on the insurance. We will go into how riders on insurance policies are impacted by a recession.

Why is the life insurance industry particularly affected by a recession? Here's what you should know.

First to go

All types of insurers have a hard time during a recession. The insurance industry works because the investment of premiums on a major scale sees huge dividends. A recession may not wipe out those dividends, but it certainly causes them to contract.

But life insurance is hit harder than other types of insurance because it is generally the first type of insurance to go. In other words, when a person loses their job or cannot make ends meet for any other reason, they will pay most other bills first.

This makes sense for most people, even if it is never ideal to default on an insurance policy. If you have to choose between short-term insurance policies - like health insurance, homeowners insurance, and car insurance, among others - and life insurance, you will naturally go with the insurance you're most likely to need.

In a recession, insurance companies see a lot of policies lapse, with unpaid premiums leading to a huge loss of income. Considering the dividends of premium investments are already lower in a recession, this has a major impact on companies.

Low uptake

But it is not just the lapsing of life insurance policies that insurers have to worry about during a recession. Insurance companies thrive on growth, with new customers every month making up for lapsed or paid policies and increasing the company's profits. During and after a recession, uptake of life insurance policies has traditionally been very low. Once again, this is unsurprising, as even those who already hold policies may choose to let them go.

Many life insurance policies are also taken up when individuals are hired by employers. During a recession, businesses may shut down and jobs may be lost, leading to far fewer life insurance policies taken up by new employees.

Letting riders lapse

As mentioned, the different types of life insurance mostly come down to riders. These are additions to a life insurance contract that provide extra features. For example, a return of premium rider has the provision that all premiums will be repaid to the holder if they see their insurance term through. An accelerated death rider allows the holder to take the life insurance payment early if they are diagnosed with a terminal illness.

Riders cause a premium to cost more, and individuals may let them go rather than letting the whole policy lapse. This still has an impact on insurance companies when it happens at scale.

Will this time be different?

We are not yet in a recession, so any ideas of how the life insurance industry may be impacted are entirely conjecture. But there are reasons to believe that this time may be different for insurers. More than the economic impact of the pandemic, COVID-19 impacted the families of huge numbers of Americans.

More than a million Americans have died due to COVID-19, and this will no doubt have changed how people look at mortality. It is no longer as abstract for many people as it once was. While some may not have considered life insurance important before, they are more likely to do so now.

This may lead individuals to do far more to hold onto life insurance policies. They are better able to recognize the importance of leaving something behind due to an increased awareness of their own mortality.

The life insurance industry will be hit hard if we do enter a recession. But this recession may be different to those that have come before, with a much greater appreciation of the importance of life insurance.