Lesser known than its cousins T-10, T-20 and T-100, T-30 (thirty-year term insurance) is emerging from the shadows. As long-term debt soars to record levels, Canadians’ new credit habits are stoking this product’s popularity.
A growing number of loans are being contracted for a 30 or 40-year term. The volume of lines of credit written on houses is exploding as their market value soars. As a result, consumers are clamouring for longer and longer term insurance.
The same phenomenon is being seen in education: post-secondary studies last longer and cost more.
Ten and twenty-year coverage is no longer enough, but T-100 products can be considered temporary in name only. That is why many insurers see T-30 as the ideal response to Canadians’ new credit profile. The new crop is a mix of pure T-30 and hybrid products that let consumers choose their term at underwriting time.
Data supplied by Transamerica Life Canada show that the line of credit has become Canadians’ second largest debt factor. Citing Statistics Canada, the insurer reports that this type of debt mushroomed by 133% from 1999 to 2005, to reach $68 billion in 2005. This boom was powered mainly by lines guaranteed by real estate. The insurer also mentioned a pilot product conducted by the Canada Mortgage and Housing Corporation and FirstLine Mortgages which found that amortization periods are lengthening among second mortgage seekers
Statistics Canada concludes that credit card debt has swelled by 58% between 1999 in 2005, to reach $26 billion. The volume of mortgage loans climbed by $572 billion between 1999 and 2005, equal to growth of 43%.
The T-30 market has been dominated by a handful of insurers and a bank for some time: Assumption Life, BMO Life, Co-operators Life, Primerica Life Canada and Unity Life.
A little over a year ago, Assumption Life began offering 10 to 35-year term in five year brackets. This product complements FlexTerm and Flexoption, flagship term products that helped the insurer double its sales in four years.
Guylaine Gauvin, sales and development manager at Assumption Life, sees excellent potential in credit insurance for insurers, whose product she considers of better quality than that of the banks. "A 50-year old insured may not know that most credit insurance offered by banks stops at age 70. Insurers’ term (except T-100) offers coverage up to age 80 on average," she points out.
In addition, the insurer underwrites the risk upon issuing the policy, whereas the bank does so at the time of the claim, she says.
Newcomers are jockeying for position with established players. One example: Transamerica is currently publicizing TERMSelect 30, its T-30 insurance product launched this January.The insurer has high hopes for this product. "We expect to see this product generate 10% to 15% of our term insurance sales within the next 12 to 18 months," says Joe Kordovi, vice-president and pricing actuary at Transamerica. The insurer racked up 20 sales in the first three weeks. "It may seem modest, but it’s more than we expected. At Feb. 20, sales of T-30 already represented 2.5% of total sales of term generated, he points out.
The insurer hopes to recoup the market share it lost in the price war in T-10 and T-20. After new term insurance business advanced by 15% two years ago, Transamerica suffered a 12% setback in this sector in 2007. The insurer ranked fifth in terms of first year annualized premiums, with an 8.1% market share
"We decided to bow out of the price war and create something new that adds value," Mr. Kordovi explains.
Advisors do not always take kindly to price wars, Mr. Kordovi continues. It is not very profitable for brokers to sell a $300 policy with an annual premium for 30% of first year commissions. This type of compensation tends to drive advisors out of the family and young insured market.
Billions in income
All the same, this market has huge potential in Canada, a recent study by LIMRA International entitled Dollar Baby reveals. The study estimates that five million Canadian households are underinsured. LIMRA also finds that one out of five households has no insurance at all. Meeting the needs of all these households would amount to a $2 billion windfall in premiums for the industry.
The study reveals that nearly 40% of households with income between $25,000 and $99,900 say they need more life insurance. Yet 73% of respondents see the high price of insurance as a stumbling block.
The T-30 product can resolve this problem, Mr. Kordovi says, because it encourages advisors to approach these households. It also comes with a higher premium and commissions. For example, the annual premium is $725 for a non-smoking male age 35 that buys $500,000 worth of coverage, and offers advisors a first year commission of 45%.
Industrial Alliance has also jumped on board. A year ago, it revamped an old National Life product, Pick a Term.
This product lets consumers select terms ranging from 10 to 30 years, depending on their needs at purchase time. Similar to Assumption’s term, the insurance amounts can be level or decreasing.
The product makeover reflects the trend toward mortgage lines of credit and longer mortgages, confirms Marie-Élaine Gaudreau, director of product development at Industrial Alliance. "We’re seeing 30 year mortgages increasingly being offered to young clients. Houses are getting more expensive," she says.