For the last four years, Canadians have been paying an increasing amount of money into their universal life insurance policies. Product design and a strong market could maintain the trend for the near future.
LIMRA International’s first quarter review for 2007 says that annualized premiums for universal life insurance (UL) products were up 8% compared to the first quarter of 2006. A little more than half of all life insurance premiums were paid into UL plans.
"We’re not surprised by the growth of this product," says David Gray, vice-president of wholesale distribution at Sun Life Financial. "It’s a product that offers tremendous flexibility for the consumer. With universal life products, everything is visible to the customer when it comes to costs and growth."
Joe Kordovi, vice-president and pricing actuary at Transamerica Life Canada, isn’t surprised by the recent premium increases either. He points out that companies have made their UL plans more attractive by expanding the kinds of investment options available, making it easier for brokers and agents to manage clients’ money. "There are also more portfolio style investment options, and that allows advisors who are not investment experts to do a risk profile, put clients in the appropriate portfolio, and then let the company manage the funds."
The aging population is helping to drive growth in universal life insurance too. Paul Smith, vice-president of marketing and product development for individual life at Manulife Financial, believes that the recent upturn in universal life premiums is driven primarily by demographics. "The baby boomers are now entering into their prime estate planning years, and so it’s a perfect sale for any permanent product," he says. "We think that there are a number of years of good growth to be had."
Subdued by subprime?
But could recent events, specifically the subprime credit crisis in the United States, put a damper on UL’s popularity?
Neither Mr. Smith nor Mr. Gray expect America’s subprime woes to have much of an effect on the product. "If they did, it would be negligible," says Mr. Smith. "I think the reality is that about 70% of UL sales are actually minimum funded. So, the investment accounts don’t really come into play very much. And then a high percentage of people who use UL don’t go into those types of equity investments either."
Mr. Kordovi is a little more circumspect. He says that UL premiums do seem to be tied cyclically to the stock market and the economy. He points to the stock market crash of 2001, and notes that a lot of the investment dollars going into UL dried up at that time. "You didn’t necessarily see a big drop in the number of policies being sold, because people still needed protection, but you saw that the excess amounts for the investment component were down."
Should a recession take hold, Mr. Kordovi suggests that money will be allocated according to a basic hierarchy of needs. Those with fewer funds to invest will top up their RRSPs first, and then divert what’s left to the investment component of their UL policies.
"To the extent the subprime mortgage crisis affects the U.S. economy and then Canada, it could impact people’s cash flow and their desire or ability to invest in universal life," he says. He also warns that businesses with cash flow problems may also be less likely to buy insurance, although he says that UL investment loan strategies could mitigate sales drops since they return a good portion of the premium dollars to the policy owner.
However, Mr. Kordovi doesn’t think a future market correction would have as severe an effect on UL premiums as the dot-com-bomb, mainly because clients’ holdings are more diversified today. They’re not simply chasing the hot indexes, as they may have been seven years ago. "If you look at where money is flowing in our UL’s lately, there’s a lot more going into GICs and portfolio accounts and a lot less going into the NASDAQ index, for example," he says.
He notes that at his company about 22% of UL investment dollars are now going into GICs, compared to about 10% a couple of years ago. The popularity of the fixed income option is partly due to the fact that, in December 2005, Transamerica started offering a rate of 4.25% (3% minimum rate plus a 1.25% bonus), guaranteed for 25 years. "You’d have to earn close to 8% in a taxable bank GIC to equal that," he says.
Saundra Edwards, assistant vice-president of individual life marketing for Great-West Life, London Life and Canada Life, notes that the popularity of universal life has remained strong even though there have been some pricing adjustments in the industry. "Universal life pricing in the industry is very competitive and provides good value for clients," she says.
Mr. Kordovi agrees that some players have managed to gain or lose UL market share as a result of re-pricing decisions, but warns that cost isn’t everything. He suggests advisors look deeper into the contract and consider the details, such as where bonus interest will be deposited. If payments are simply made to a daily interest account, the advisor will need to contact the client annually to decide how those funds should be invested inside the policy. Otherwise the client could end up with considerably less than had been projected.
He also believes it’s important to keep an eye on the management expense ratios (MERs) charged by the investment funds inside the UL policy.
"People compare two UL products using the same interest rate, but one might have a lower MER," he says. If advisors fail to compensate for different fee levels between policies, they could end up selling the client the more expensive plan.