Whole life insurance sales surged during the frenzy preceding the coming into effect of new tax rules on Jan. 1, 2017. Sales then slowed, unable to match the strength of 2016. However, sales of permanent insurance products, including whole life, are expected to rebound in the second quarter of 2018.
Before the new tax rules limited the amounts those policyholders could set aside tax-free in permanent life insurance products, advisors who work with high net worth clients scrambled to close their outstanding cases. In terms of new annualized premiums, whole life and universal life insurance sales outperformed, even creating a spillover, particularly in Q4 2016 and Q1 2017. Not surprisingly, sales in the following quarters could not measure up.
According to the most recent LIMRA report on individual life insurance sales in Canada in 2017, whole life insurance sales slipped by 20 per cent since 2016 in terms of premiums. This plunge reached 61 per cent in Q4 2017 compared with the first quarter of 2016. The research firm told The Insurance and Investment Journal that it expected another decline in the fourth quarter of 2018, which may be the last backlash. LIMRA will publish its official first-quarter results in May.
“Despite there likely being some decline in Q1 due to last year’s strong first quarter, several contacts from member companies have indicated they believe the severe fluctuations are over. It’s likely that the second quarter of 2018 will see some growth on an industry level,” Matthew Rubino, author of the LIMRA report on individual life insurance in Canada, explains.
Rubino projects that whole life will be driving this growth. “Given that whole life premiums accounted for 57 per cent of new premiums in 2017, the majority of industry growth will be based on whole life’s performance,” he adds.
Whole life insurance sales have regained their usual pace. “Assumptions that whole life sales would be depressed following the sales frenzy due to tax exemptions can be left behind. By the end of 2017 whole life premium figures had surpassed those of 2015 (pre-reform levels), so it seems that the effects of the tax changes has ended,” Rubino says.
Regaining its previous strength will be hard for universal life insurance. “UL is close to 2015 premium levels and is likely to return to those levels in the next few years,” Rubino says. In an even starker contrast with 2016 sales, universal life insurance sales slipped by 30 per cent in 2017.
“2016 was a bit of an anomaly,” says Guy Couture, Head of Individual Insurance Sales, Quebec at Manulife. Whole life saw a strong upward trend then, Couture says. He thinks the worst is over. “Sales are stable compared with Q2 2016 and even Q4 2015,” he points out.
For the industry overall, sales results for the third and fourth quarters of 2016 are exceptional compared with the last 10 years, says Stéphane Beaumier, Regional Vice-president, career network, at Sun Life Financial. “We tried not to compare the 2017 results to those of 2016 but rather to the 2015 figures,” he explains.
Results published by LIMRA on sales trends since 1995 show that whole life insurance sales have advanced steadily since 2005.
The learning curve for new products also hampered sales in 2017, says Saundra Roll, Assistant Vice-President, Business Development and Solutions, Individual Insurance at Great-West Life. “With the tax changes that came into effect on January 1, 2017 we saw a spillover of business from 2016 delivered in the first quarter of 2017. More changes than just those required because of the tax changes have been made to some of our products, and advisors need more time to adapt,” she says.
Great-West also expects sales to decline in the first quarter of 2018 compared with the same quarter of 2017. Roll predicts a return to growth in the second and third quarters of 2018. “Advisors had six months of running very hard to complete business before the end of 2016. They did two years of business in less than a year. Many advisors took time off in Q2 2017 as a result,” she explains.
Today, the network is buzzing about business picking up and advisors opening new cases, Roll says. “Sometimes, large cases can take up to two years to be closed. It depends on the size and the complexity of the case, and whether the accountants, lawyers and other professionals of the client are involved,” she adds.
Sun Life Financial also observed the learning curve effect. “We changed all our products on Jan. 1, 2017,” Stéphane Beaumier points out. “We had to train advisors in the new products. People had a good year-end 2016. In the third and fourth quarters of 2017, sales began to regain steam to their 2015 levels. It took time for advisors to find their way around the new products.”
Permanent insurance sales in Q1 2017 will form the last tax bubble, insurers say. “When it comes out in May, the LIMRA report for the first quarter will confirm sales decreases because sales were still unusually high in Q1 2017,” says Louis-Charles Leclerc, director of insurance products at iA Financial Group.
The second quarter should be even more interesting, Leclerc adds. “We will see which product grew or not. Participating whole life insurance products are still quite popular. They form a large market in which advisors seem to have strong faith.”
LIMRA figures on premium distribution by product indicate that 84 per cent of whole life insurance sales in terms of premiums went to participating products in 2017.
Participating whole life sales may slow down, Leclerc points out, because this product was weakened by the fact that several companies lowered the dividend rates from year to year. “It is more vulnerable. Having learned to love it when dividend rates were high, advisors may drop it when rates slide and sell something else. We will have a clearer picture later in 2018,” he says.
Dividend rates are falling due to constant pressure from low interest rates, Leclerc adds. “Companies like Sun Life and Great-West sold many of these products, whose premium flow was invested at lower returns,” he says. “The companies that can maintain their dividend rates are the ones that earned good returns in the equity portion of their participating funds,” he says.
IA Financial Group has no participating product. “We have a competitive product in this market: EquiBuild, our universal life,” Leclerc says. In contrast with participating whole life products, iA positions EquiBuild universal life as a product where everything is guaranteed and known in advance, unlike the amount of the surrender value and dividends that the whole life participating fund will credit at maturity.
The product was launched in 2015 in the run-up to the federal tax law reform, Leclerc points out. “EquiBuild offers a bonus linked to the performance of a fund at a guaranteed rate for four years,” he says. However, like the funds of participating whole life policies, the EquiBuild fund has felt the pressure from low interest rates, he admits. “Our rate is set at 5.5 per cent until 2019. Stock markets may help us, but what will happen four years from now, no one knows.”
He adds that although iA offers a whole life insurance product, “universal life is still more important in our individual life insurance sales, and represents at least 90 per cent.”
Manulife will join the ranks of participating whole life suppliers. “Toward the end of the first half of 2018 we will introduce a participating whole life product,” says Guy Couture. “We had discontinued it in 2008, but we now decided to get back in the game. Whole life is generating good sales volumes and we want to take advantage of that,” he says.
The insurer currently offers nonparticipating whole life that resembles a participating product, Couture continues. “Our Performax Gold and its Gold fund have the same structure as a participating fund. The return is robust. The new product is an additional option for clients who seek estate planning solutions,” he says.
Insurers Sun Life and Great-West are well established in the participating whole life market. “We sell a lot of whole life insurance, universal life and term,” says Stéphane Beaumier, Regional Vice-president of the career channel at Sun Life Financial. “Universal life had been ebbing in recent years. Now we are selling a little more, but we are selling less participating whole life insurance.” Sun Life can still rely on the success of its nonparticipating whole life product payable in 10 years or 20 years to shore up sales.
Saundra Roll of Great-West Life admits that the dividend scales are slipping, but does not see a strong flight from participating whole life. “Our par account is a fixed income portfolio; it is invested 80 per cent in fixed income assets and 20 per cent in equities. In Canada we have been in a declining interest rate environment for 10 years. This impacts returns on the assets in the participating account, and as a result the dividend scale interest rate, which is the investment component of the dividend scale,” she explains.
A switch to non-participating whole life is not in the cards, she adds. “I don’t think we’re going to see a shift to non par whole life. When you look at the internal rates of return on participating whole life products, it may be lower than 5 or 10 years ago, but it’s still very good in comparison to other fixed income investments. In addition, participating whole life returns gains on mortality and expenses through dividends, while non-par whole life only returns gains on the investment component,” she explains.
Another plus for participating whole life: the interest rate of the dividend scale represents a point in time return on the assets in the participating account, Roll says. “The DSIR will vary upward and downward over time and will differ in any year across companies based on differing investment strategies. The DSIR is not what your policy will earn or is earning,” she says.
Policy illustrations use this one-year return and project it for the duration of the policy, she underlines. “That isn’t an accurate reflection of what your policy will earn, it is intended, along with the reduced example, to show how your policy works under differing assumptions. I think it has become too easy to focus on that one number and use that to compare products,” Roll says.
Sales are bolstered by clients who buy a permanent product primarily to cover an insurance need, Beaumier points out. “We are not seeing a very marked drop in volume in our career network because it does not target an affluent clientele exclusively. It is clear that for large insurance demands, for example for an annual premium of $30,000, we are seeing a decrease,” he says.
“We must continue to sell new permanent products, but focus our efforts more on our clients’ insurance coverage needs. If we get back to the basics, our permanent insurance sales will continue to be supported as they were before 2016,” he adds.
Leclerc of iA Financial Group says that the new tax rules will have a minor impact for most clients in Canada.
It all depends on where the advisor works. “Much of the market is made up of clients who do not invest additional money in life insurance. They pay the minimum premium,” he says.