Whole life insurance sales have been gathering considerable momentum in this country.
According to the latest LIMRA statistics, in 2011 universal life insurance sales were up by 1.2 per cent. By comparison, whole life insurance sales increased 17.5 per cent.
“Markets have been fairly volatile and not providing a great return,” says Karl Simon, director of product and marketing for Equitable Life. “I believe advisors are going over to whole life insurance because what it does is it provides a good return without the volatility.”
Whole Life insurance, as the name implies, provides insurance for the insured’s lifetime. The premiums are also level, and the plan provides guaranteed cash values.
“Whole life values are based on the performance of an underlying investment account called a PAR account and the PAR funds are managed to provide a smooth return over time,” says Simon. “The underlying fund is invested in a diversified portfolio, but the amount of the return that’s actually credited to the policy is smoothed out over time by only paying out part of the gain of each year. So, you develop a build-up of excess returns from previous years, and those returns are then used to provide returns for future years. When the return in previous years is not as good as it has been in the past, then it kind of gets bumped up. When the return for the current year is better than it has been in the past, well, it kind of gets dropped down a little bit.”
In contrast, a universal life insurance policy offers the opportunity to invest in equities or balanced accounts, but when those investments have a negative return, then the client has a negative return. So whole life insurance offers a very conservative and stable investment portfolio with very little volatility. Also, your dividends can never be taken away from you once they are paid, but with universal life your gains can vanish if the money remains invested and the market drops. As a result, advisors recommend whole life insurance much more frequently.
Whole life policies can be divided into the following two categories: participating policies (in which the policy owner participates in their insurance company’s profits and the plan pays out a dividend) and non-participating policies (which are lower in cost and do not pay out a dividend).
“A lot of this rise in sales is being driven by participating whole life policies,” says Simon. “What participating whole life is, is in addition to having the guaranteed cash value that works very similar to a non-participating whole life cash value — it’s guaranteed, growth equals the face amount by age 100 and it starts slow and builds up over time — in addition to that, participating whole life insurance also has the opportunity for additional cash values, based on the return of the underlying PAR fund. The premium that you pay for it is quite a bit more than a traditional non-participating whole life policy, but you get the higher potential cash value in the long run.”
Simon’s company, Equitable Life, is leading the charge when it comes to the rise in whole life insurance sales and innovative enhancements to the product. Equitable Life enhanced their participating whole life plans in February of 2012 and have one of the best plans on the market. Whole life plans are becoming particularly popular thanks to insurance companies raising the rates on their universal life plans or cancelling them altogether due to interest rates at record lows.
Each time long term interest rates drop, the profitability of the product decreases further. On August 27, 2012, Canadian long-term bonds (over 10 years) offered interest rates of 2.38 per cent versus 3.01 per cent a year earlier. As a result, the price increases have been sharpest among younger applicants and applicants who are looking for guaranteed limited-pay policies. Limited-pay plans are policies in which the insured is covered for life but the cost-of-insurance charges are guaranteed to stop at the end of 10, 15, or 20 years.
One of the reasons Equitable Life is still among the best companies in the industry for participating whole life insurance is that Equitable is a mutually-owned company, so policy holders are truly part-owners in the company.
“With Equitable participating policy holders retain and ownership stake in the company,” says Simon. “It gives you voting power in the direction of the company as if you were a shareholder, and in addition to that, they are entitled to any payout the company might make to its participating policyholders — much like a public company may pay a dividend to its shareholders.”
However, the payout from the company is separate from the dividend that the actual participating whole life policy pays out.
“They really are two different things,” says Simon. “Stock companies like Canada Life offer a participating product. They pay dividends to their shareholders and they also pay dividends to their policyholders. They really are two different dividends and a company can pay one and not the other. They’re not tied to each other. With equitable life, participating whole life insurance policyholders would get the dividend from the insurance policy and then also get the proceeds from the dividend the company may pay out.”
