After taking a hit during the crisis, universal life insurance sales are regaining ground thanks to growing investor and advisor confidence. While minimum premiums are making a clear comeback, overfunding of investment policies is uneven between players.
Investment in universal life insurance (UL) policies was in freefall in 2008 due to the economic crisis. Minimum funded policies were hit particularly hard. Additional deposits, often called "excess premiums" or "overfunding" suffered even more.
In 2009, new UL premiums declined compared with 2008. LIMRA International figures show that UL product sales improved in the fourth quarter. (For more details see The Insurance and Investment Journal, April 2010.)
The average premium was $1,688 per policy in 2009, which was only slightly higher than in 2008. The average face amount was $215,125, down slightly from 2008.
Groupe Cloutier, a large managing general agency (MGA) based in Trois-Rivières, Quebec, reports that while UL is rebounding strongly in the first few months of the year, excess premiums still haven't reached their pre-crisis level. "Tax free savings accounts (TFSAs) are garnering a good portion of the excess of RRSPs," says Patrick Cloutier, Vice President, Sales and Business Development.
The introduction of the TFSA on Jan. 1, 2008 has dampened investors' interest for UL, he believes. "If you have $5,000 left after topping off your RRSP, the advantages of putting it in a TFSA rather than universal life are undeniable," Mr. Cloutier points out.
TFSAs let individuals invest up to $5,000 per year, and investment gains are not taxable. Unused room can be carried forward to the following years with no time limit. This vehicle allows unlimited withdrawals and investors can offset withdrawals at any time with equivalent premiums. Premiums are also exempt from taxes on gains.
Financial Horizons Group, an MGA based in Kitchener, Ontario, analyzes UL sales results in depth. It shared its most recent findings with The Insurance and Investment Journal. For the twelve months from April 1, 2009 and April 1, 2010, premiums rose by 9% compared with April 2008 to April 2009. Between the same two comparison periods, the number of UL applications increased by 11%.
The analysis does not look at excess premium results, but their growth is negligible, says Tony Ryan, Executive Vice President at Financial Horizons. "UL growth is up, but overfunding is basically flat. There's no real trend that shows overfunding is back in UL policies and I don't think it's going to change in the short term. It will depend on how quickly people can forget the crash." For now, he adds, whole life insurance sales are at centre stage.
Meanwhile, insurance companies report marked growth in UL premiums. Some are also seeing increased overfunding.
Manulife Financial reports growth of regular UL premiums of 2.5% in Q4 2009 versus the same quarter in 2008. A benchmark index at Manulife, regular premiums correspond to the insurance cost of policies plus 10% of overfunding deposited. Basic premiums and overfunding is rising, says Paul Smith, Vice President, Marketing & Product Development for Individual Insurance at Manulife.
" Universal life sales are back to what they were before the crisis. In 2009, estate planning dried up, policies usually sold for business buy-sell agreements and estate transfers to the next generation were put on hold. All indicators show that it's coming back. We see the return of larger UL amounts than we were seeing in 2007 and before September 2008, " Mr. Smith says.
Saundra Edwards, Assistant Vice President, Individual Life Insurance Marketing and Product Development at Great-West, Canada Life and London Life, has observed a sustained rise in UL sales over the last two quarters, which she attributes to an upswing in investor confidence in the economy and in stock markets. She reports a 10% increase in UL premiums in the first quarter of 2010 at Great-West and subsidiaries. Q4 2009 also saw solid improvement in this market, she confirms.
Ms. Edwards adds that there has been growth in both minimum premiums and overfunding. "We've seen both: more UL policies and also more well-funded UL policies," she says.
At Transamerica Life Canada, the upswing intensified in Q4 2009. Minimum premiums rose by 23%. Premiums, including excess premiums, were up 14% since Q4 quarter 2008. The number of policies sold grew by 15% during the same period. The trend continued in Q1 2010, the insurers says, with basic and excess premiums gaining 8% compared with the same quarter in 2009. The number of policies also climbed by 5% during the same period.
"The return is gradual. Last year, we concentrated our efforts on this, as did our distributors. We successfully portrayed universal life as a financial planning vehicle well adapted to the market of middle-income Canadians," says Joe Kordovi, Vice President and Pricing Actuary, Life Products, at Transamerica Life. The insurer revamped its product portfolio in recent weeks. "Our success has been due to our efforts in helping position UL as a well-rounded financial planning vehicle for middle market Canadians," Mr. Kordovi adds.
RBC Insurance sees a gradual improvement in overfunding as natural. "Consumers are showing prudent optimism and we can't blame them," says Natalia Witkowsky, Director, Product Development, mass affluent markets. After having weathered an unprecedented crisis, investors now want to know where and with whom they are investing. They want to deal with institutions that they trust, which works in RBC's favour."
The insurer did not provide figures to back its growth, but confirms that its UL sales were heading in the right direction. "Our average premium sold in universal life was several times higher in February than what it was in the same period last year," Ms. Witkowski says.
In its annual report, Industrial Alliance reported a sharp drop in overfunding in 2009, with a 27% decrease since 2008. These premiums plummeted to $20.7 million last year from $28.3 million in 2008. They had peaked at $48 million in 2007.
The insurer's minimum premiums were up 7% in 2009 versus 2008. These premiums are for all insurance products combined, including 53% for universal life. Growth in the number of policies stood at 5% for all products combined. In addition, the report states that the insurer was the top universal life seller in Canada in the first three months of 2009.
"Our market share in terms of minimum premium sales in Canada edged from 11.2% to 11.4% in 2009. The family market drove minimum premiums while the wealth management market has declined," says Jacques Carrière, Vice President, Investor Relations. At Industrial Alliance as at other insurers, the strength of the wealth management market dictates the pace of overfunding.
Even if overfunding is bouncing back at some players, sales are not booming yet, Ms. Edwards says. When there is volatility, consumers shun products whose redemption value fluctuates with the market. "It happened earlier in the decade. But 2008 has been more dramatic, with a longer and more lasting impact on UL sales. It's hard to say if people's memory will be a little longer this time about the impact the crisis had on their cash values," she adds.
Until now, premiums have been flowing toward guaranteed products like whole life, Mr. Smith says. "People were moving to guarantees. Limited pay UL was up 22% between 2009 and 2008, [although] the rest of the UL market was down," he explains.
That said, Mr. Smith predicts a bright future for UL in 2010 especially in the wealth management market due to the aging population. "There's a growing aging population with considerable wealth to transfer to the next generation, and UL is especially well suited for the estate planning market. This piece of the market is only going to grow."