With the current bullish stock markets, active management investment options are front and centre in universal life insurance (UL), a product recognized for the security of its index options.
Once limited to just a few products, investment options associated with investment funds and fund portfolios are on the increase in the universal life insurance market. It appears that the recent rise in the stock markets has made investors forget the dark, post-Enron days.
According to Joe Kordovi, vice-president and pricing actuary, life marketing products at Transamerica Life Canada, this tendency of investors to eye higher risk strategies such as active management is pronounced.
These investors fall into three categories, explained Mr. Kordovi. “Things have changed since 2004,” he began. “Now, one third of investors are opting for mutual funds, one third for index funds, and one third for guaranteed investment certificates (GICs). The big drawing cards are currently portfolios and mutual funds with lower service charges.”
Mr. Kordovi also mentioned that Transamerica added 12 mutual funds to its product line in November 2005 to meet broker demand.
Martin Vézina, a product development consultant for individual insurance at Industrial Alliance, is in complete agreement. “Active management accounts handled by external managers are the most popular,” he stated. “People prefer these for their increased potential of higher yields and their solid track records.”
Industrial Alliance has also expanded its offering of these active management products, adding eight new funds.
Recognized mutual fund companies such as AGF, AIM-Trimark, Bissett, CI, Fidelity, Mackenzie and Templeton are names that figure prominently in the market.
Policyholders who invest in UL products are also seeking access to the expertise offered by active managers.
Investors no longer hesitate to opt for Canadian equity portfolio funds, even those considered aggressive, because they can draw on the knowledge of fund managers, according to Saundra Edwards, assistant vice-president, life insurance marketing, for Great-West Life, Canada Life and London Life.
“People choose portfolio funds of Canadian equities, from balanced to aggressive, because they’re getting the expertise of money fund managers. That’s what we see as being very popular,” she observed.
She went on to mention that Greystone is among the funds that are currently drawing investors. London Life has added three funds from this family to its product line. ABC Funds, a Canada Life product, has also met with considerable success.
Ms. Edwards has also noted that policyholder investors have become highly sophisticated. As they near retirement, they want more choice, and they want access to their favourite mutual funds.
With the increased trend towards active management, investors are taking more risks than if they limited themselves to a passive index. However, they also want to take calculated risks. The era of wild speculation is over, say UL experts.
Mr. Vézina can recall the days when investors were only interested in NASDAQ funds. “Many people wanted these funds included in their UL investments,” he said. “Today, NASDAQ’s star has faded. People are looking for more secure products.”
Jean Roy, Standard Life Canada’s manager, product development and management, insurance-based products-retail markets, confirms this trend toward security. He, however, has not observed any particular increase in interest for active management.
Universal life insurance clients tend to favour active management indexed accounts over interest accounts. “They are buying more indexed than fixed funds,” he affirmed. “Canadian index funds, for example, produce a great deal of excess premiums,” explained Mr. Roy, who has also observed that clients are often choosing balanced funds.
Experts believe that one reason UL is attracting a growing number of clients despite the tough economic times is because the product has succeeded in adapting to the latest trends.
One of these trends is the aging population, which means the market still has room to grow.
In fact, Mr. Kordovi believes that inter-generational wealth transfer will become a major driver of investments in UL products. He maintains that UL represents an efficient way to transfer these funds, because the next generation will receive the money as a tax-free life insurance benefit. And in the meantime, the money made by the policy also remains sheltered from income tax.
In the same vein, Ms. Edwards targets baby boomers aged 45 and beyond with her three products (Canada Life, Great-West and London Life).
In her opinion, this generation is more philanthropic than those of the past. “They say they want to have a lasting effect on society. They’re looking to ways of giving assets; sometimes they want to leave a substantial gift to society,” she stated.
She believes that this trend has led to the development of a new market, one of planned charitable donations. There are also grandparents who wish to arrange to leave certain assets, not to their children, but to their grandchildren. “They may be wanting to provide their grandchildren with a start in life,” she explained. “There are different twists and turns.”
YRT a popular choice
According to Mr. Roy, yearly renewable UL has become the most popular option among investors. “This is a good year to increase sales in this niche,” he confirmed.
Transamerica saw a similar trend in 2005. According to data provided by Mr. Kordovi, yearly renewable premiums were the choice of 62% of Transamerica policyholders, compared to 38% who pay levelled premiums.
Mr. Kordovi also pointed out that some 10% of UL insurance sales made in 2005 resulted from conversions from term insurance at preferred rates to a UL policy, also at preferred rates.
Ms. Edwards added that the upward swing in the market has prompted policyholders to inject more surplus money into their UL insurance policy than before. Universal life insurance with yearly renewable premiums is preferred, because the cost of pure insurance is low during the initial years.
Insurers are often discreet when it comes to discussing their market share in specific products. Among those who were willing to talk, Mr. Kordovi revealed that, according to LIMRA International data, his company’s market share (managed premiums) stands at 12.3% in Canada.
Ms. Edwards stated that Great-West increased its UL market share from 6% in 2004 to 9% in 2005.
This success is partly due to a significant jump in sales of the product by Canada Life. It is currently the most popular product, explained Ms. Edwards. In total, UL sales by Great-West, London Life and Canada Life grew by 13% in 2005, she added.
According to its 2005 annual report, 63.6% of Industrial Alliance’s individual life insurance sales were UL products, to the detriment of levelled or yearly renewable policies. The insurer ranked number one in Canada in UL policies, holding 16.9% of this market niche.