As level cost universal life insurance rates rise steadily, advisors are seeing whole life in a new light.Dominique Demers, president of Financière S_Entiel, a managing general agency member of Groupe AgenZ, says that continual rises in level cost are spurring advisors to shop around.
“Level cost increases reflect insurers’ growing awareness of product profitability. At the same time, advisors are becoming more aware of the advantages and particular features of products of other lesser-known companies,” Mr. Demers explains.
One result: advisor loyalty toward favourite companies is eroding, he continues. “This variation in premium rates or decreases in guarantees is driving some advisors out of their comfort zone,” Mr. Demers says.
He has witnessed advisors’ discomfort firsthand, especially for large cases with long processing times – it often takes 6 to 8 months from the initial meeting with the client until the policy is issued. Rates may change several times in the interim, Mr. Demers says. “Sometimes the advisor proposes another product because the first product suggested is not competitive anymore,” he points out.
“I have given up on level cost universal life insurance,” says André Cyr, an advisor specializing in high net worth clients. The president and founder of Fisc-Cap Services Conseils is shifting his production toward whole life.
“This is the third increase in level cost in 20 months, and I expect it to continue,” he says. He also noticed a drop in minimum rates credited to investment accounts. “How can I sell a product that offers a minimum rate of 0.5% on a five-year guaranteed interest account? My client will say that he’d be better off leaving the money in his company.”
Before the three rounds of increases, Mr. Cyr could insure a male non-smoker age 50 for $1 million of level cost universal life for $10,000 per year. Now it would cost $14,000. “Whole life costs less and offers guaranteed redemption value. I have been selling it exclusively for the last four months,” he says.
James McMahon, president of the Quebec division of the Financial Horizons Group/Force Financière Excel, confirms a trend toward whole life in recent weeks. “Our advisors are selling more and more T10 and T20 insurance and whole life. Just like 25 years ago, advisors are selling whole life for the client’s basic needs and term to meet their short-term needs,” he explains.
On the supplier side, Louis-Charles Leclerc, individual insurance product manager at Industrial Alliance, also noticed this trend. “Our advisors redirected part of their business toward whole life. Since the increases, the price gap in UL’s favour shrunk. But the largest migration we’re seeing is toward term. Advisors and clients are saying ‘We can always convert later,’” This trend is emerging in both the career and MGA networks, he adds.
Why are advisors skirting annual renewable term UL? This product has been spared the increases because it is not sensitive to interest rate movements. ART is not an enticing alternative for advisors, Mr. McMahon says. “Advisors see this product as less advantageous for the client because the cost of term insurance is rising each year,” he explains.
For older clients, ART eats into their accumulated capital, Mr. McMahon adds. This problem is aggravated by insurers’ cutting their guaranteed rates on fixed income investment options. It is consequently less likely that the funds in the policy will outpace the cost of insurance.
At one firm, conversion is stoking sales of level cost UL insurance. The Québec division of Horizons/Excel launched a campaign in June that will last until winter. It invites advisors to suggest that if possible, clients convert their term insurance policies into universal life. One of the goals: act ahead of inevitable future increases, Mr. McMahon explains.
He says that Ottawa is planning to tighten the tax rules governing universal life deposits in 2013. Revenue Canada plans to revise the tax test that determines the maximum savings amount that insured can accumulate in a policy without affecting the tax exemption. The new exemption test apparently allows more tax-free accumulation in the first years of the policy, but less later on.
Clients who can afford UL should buy it, Mr. McMahon insists. “That way they can freeze its price and their insurability. We want to make advisors realize that the changes Ottawa foresees will give them an extraordinary tool to impress their clients,” he says.
Clients who could benefit from conversion include entrepreneurs who have money available in their company. “Universal life is the only product that will let you grow your capital tax-free, regardless of price increases,” Mr. McMahon points out.
In addition, the popularity of whole life insurance may soon motivate insurers to revise prices upward, André Cyr says.
Desjardins Financial Security (DFS) recently issued a memo to its advisors that validates these concerns. On Sept. 13, the insurer raised the average prices of its permanent life insurance products by 5% to 7%. “In today’s low interest rate world, insurers have been obliged to raise rates on their permanent products,” the memo reads.
The increase affects the following products: MaxLife (T100), Life 10, Life 20, Foundation (T100), Precision 10, and Precision 20.