The Future of Whole Life Insurance
Life insurance companies in Canada have been under increasing pressure thanks to historically low interest rates. However, the Toronto Star reports that these low interest rates may soon disappear.
Low interest rates are generally bad news for banks and insurance companies, as they begin to invest your premiums and deposits in long-term bonds and other guaranteed investment vehicles to help offset future obligations.
When interest rates are lower, they squeeze the profitability of an insurance company's operations. This is especially true for permanent life insurance policies. Whole life insurance offers lifetime protection, fixed premiums, and in the case of participating whole life insurance, a non-guaranteed dividend. This dividend usually takes the form of increased cash values or death benefits. Participating whole life policies have still been paying out very attractive yields (some in excess of 6%) given the state of long-term interest rates in Canada.
However, the trend is likely to sink, as insurance companies are having to cash in maturing higher-interest-rate bonds for newer, lower-interest-rate bonds. New companies wanting to enter this market are also finding it very difficult, as they're having to price their products based on today's low interest rates.
So what can we expect in the future from life insurance companies?
LSM president Chantal Marr says consumers can continue to expect an increase in the number of adjustable whole life plans. Adjustable whole life policies shift the risk from the insurance company to the consumer because the premiums on these policies are adjusted in relation to interest rates.
If interest rates decrease, the premiums on these plans increase. Obviously, if the interest rate increases, the premiums on these plans will likely decrease.
Empire Life recently introduced an Adjustable Term 100 policy, and Industrial Alliance has introduced a Universal Life policy with an adjustable cost of insurance option. Now may be a good time to look at adjustable whole life plans, since it's unlikely that interest rates will fall much farther before capping the amount of risk the consumer can take on.