Bank-of-Canada-Low-Interest-Rates
Mortgage rates have begun to climb up in recent months.
But, with The Bank of Canada keeping its interest rate the same and economists speculating that it will not go up until 2015, many wonder if this mortgage rate climb will lead to insurance companies forcing the rates on their Universal Life policies down.
According to CBC, TD, RBC and BMO have all raised their mortgage rates by more than a third from less than 3% to something closer to 3.79%. They’ve been increasing because “banks are facing higher yields on Canadian bonds a result of the U.S. Fed signalling to investors that it will soon taper its purchase of U.S. bonds and mortgage-backed securities.”
When the U.S. Federal Reserve was buying bonds and mortgage-backed securities Canada was getting an influx of foreign capital, which will now slow down thanks to this announcement. Even though mortgage rates are rising, The National Post says that this is no need to panic and you don’t need to lock in your current borrowing rate in anticipation of the interest rates rising in other areas. Though companies are locking in, you don’t have to because a variable rate mortgage hasn’t moved and still can be had for as little as 2.55%. Plus, the prime interest rate isn’t expected to move until 2015.
As a result of this history of low interest rates, most Canadian insurers have either increase their premiums or removed many permanent life insurance policies from the product portfolio. The most common policies to have an increase where universal life level cost of insurance policies. Many companies did up to three rounds of increases and premiums have gone up as much as 35%. Some companies, including Assumption Life and Foresters‘ Life Insurance Company have removed Universal level cost of insurance plans from their portfolio all together.
The question is, now that long-term interest rates are starting to creep up, will insurance companies finally start to adjust level cost universal life rates downward?
Manulife Financial, one of the major trend setters in the Canadian Life Insurance industry, recently adjusted its level cost Universal Life rates downward at certain ages and face amounts, while increasing its commission to brokers, following a previous decrease.
However, LSM insurance expert Tamara Humphries thinks that it is unlikely, at least in the short-term, that Universal Life will decrease significantly.
“Most insurance companies were itching for a reason to increase level cost universal life rates. These products were not profitable for many years and it would take a big swing in long-term interest rates to push the hand of most insurers to up the rates,” she says.
There is an option for universal life insurance costumers no matter what happens with the interest rates. Industrial Alliance recently designed an adjustable, level cost universal life plan. This allows for a lower initial cost of insurance and shifts the risk of decreasing interest rates to the consumer. If rates decrease further, then their cost of insurance charge could go, up but if interest rates rise, then the cost of insurance could go down. The plan also has a built-in maximum charge, so the consumer does have the benefit of knowing how much the rates will increase by.
For more details on Universal Life rates in Canada, please contact us at 1-866-899-4849 or visit our Universal Life Quote Page.
I have long ago learned that the crystal balls used by the “experts” are just as cloudy as everyone else’s, and that the crystal balls used by self-proclaimed “expert” financial journalists working for commercial media are also painted with advertisers’ dollars. Having learned that, and having employed a contrarian investment strategy (doing the exact opposite from what financial journalists recommend) has produced far better ROI than the alternative over the long and medium term.
As for myself, I find US mass media so called “expert” financial journalists and commentators to be especially useful – to hear and read their financial suggestions and recommendations and to do the exact opposite. The native North Americans used to hunt buffalo by stampeding buffalo over a cliff. That method was not so good for the buffalo 🙂
That’s very true Ami. But a surge in interest rates would have a big impact. Stranger things have happened when the Canadian dollar was at 65 cents many experts predicted it would go down to 50 cents and the exact opposite happened.
There are numerous “moving parts” involved with this question, each bearing its own relative weight and significance. The “biggies” are long and medium term net investment returns, capital cost of opportunity considerations, and market forces (the latter involving targets for market penetration, and relative competitive position in the market incl. position on LifeGuide). Other notable considerations include claim and lapse experience and the potential bonding of these in the event that United States -style “life settlement” would gain traction.
In general and overall, though, I would concur with Chantal’s observation.