Universal Life Insurance Sales Shrink

money 9
Universal Life is losing
the market to Whole Life.

Historically low interest rates have caused many insurance companies to either raise the premiums on their universal life insurance policies or remove them from their product lineup all together.

Well, these moves have consequences. And in a lot of ways, those consequences have now come home to roost, as universal life as a product category lags behind whole life insurance in terms of market share.

“Most of the shift in Canadian individual life sales has been a UL shift to whole life in terms of permanent products market shares,” LIMRA’s individual life insurance survey coordinator Karen Terry told The Insurance and Investment Journal.

LIMRA’s research revealed that since having 53% of all the individual insurance premiums in Canada in 2008, they now make up a comparatively tiny 26% of a premium share. Whole Life has made up the difference in the pie with  45% of the market, a staggering increase from only 23% five years ago. Even before this leap, in 2012 it stole 7% of the UL market share compared with 2011 — a sign of things to come.

So why is this happening? Terry agrees that much of this is caused by companies responding to the low interest rate environment and customers finding those higher rates on universal life plans more expensive.

 “We see the two strategies on the U.S. side as well as in Canada: companies are adjusting the features of the products to mitigate the low interest rate environment,” she added.

Karl Simon, Director of Product and Marketing for Equitable Life, attributed the decline in a previous article on LSM to market volatility and the desire of most advisors to move to whole life insurance because it’s a more stable product.

“Markets have been fairly volatile and not providing a great return,” he said. “I believe advisors are going over to whole life insurance because what it does is it provides a good return without the volatility.”

What creates the stability in a whole life policy is the performance of an underlying investment account called a PAR account. The PAR funds are managed to provide a smooth return over time.

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 build up excess returns from previous years, and those returns are then used to provide returns for future years.

On the other hand, 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 there are many more consequences to the investment in a universal life policy.

According to Art Robson, president of Future Planning Insurance Agency Ltd. of Pickering, clients did not foresee the financial crisis of 2008, so the advantages of universal life, like a choice of either whole life or term insurance for one annual payment and the idea that the balance of that payment can go to an investment of a client’s choosing, didn’t look as attractive as they once did.

“Most younger people went for term insurance; the premiums were really low,” he told the Toronto Star. “That meant they could put a lot more into savings.”

“The challenge with these policies always comes when you have to renew insurance coverage,” Allen Wong, president of Allen Wong & Associates Insurance Agency in Thornhill, also told the Star. “When you are 40, the premium on a 10-year term policy might be $800 a year, but, at 50, the same coverage will, likely be $1,500 to $2,000.

“If, in those intervening years, you develop a serious medical condition like cancer or a heart attack, changing to a new insurance carrier may be impossible. Your existing insurance company has to extend the policy, but they are going to charge very high premiums, indeed, because of the risk.”

Plus, if a client decides to sell of the investments they gained from the investment portion of the policy, the proceeds are treated as income and are fully taxable. So that’s another reason clients are staying away.

Jonathan Matthews, a consultant at Firstbrook Cassie & Anderson Insurance, told the Star that while you should still buy insurance, you should use the extra income that you’d need to pay a universal premium on paying off your debts first, like a mortgage.

“Right now, I see universal life has having the most appeal to someone aged 50 and up, who is mortgage-free and has a fully topped up RRSP, and now has turned their mind to estate-planning,” he said.

Another reason universal life may be disappearing from the insurance landscape is advisors know that it’s very confusing for the average client, as there are three different risk charges to choose from. Some policies even allow the client to split their policy’s components into different cost of insurance options.

The risk can be split up into the following cost of insurance options:

1. Increasing Cost of Insurance: On this option, the charge starts very low but increases on an annual basis until age 100. The advantage here is that the cost of insurance is very low in the intial policy years, which allows the applicant to maximize the cash value in the early policy years. The disadvantage is that the cost of insurance becomes extremely high in the later policy years and if the underlying investment under performs, it may be insufficent to carry on the coverage.

2. Level Cost of Insurance: With this option, the cost of insurance is based on Term 100 costs — the cost of insurance never goes up as the insured gets older. The advantage of this option is cost certainty for the insured (always knowing exactly how much it will cost). The disadvantage is the intial cost is much higher so the cash value isn’t as significant in early policy years.

3. Hybrid Insurance: Many insurance companies offer this option, which includes an increasing cost of insurance with the option to switch to a level cost at a certain point and time. This hybrid scenario is designed for people who want to maximize their cash value in the early policy years, but prefer to have cost certainty in their policy in later years.

If you’re still interested in considering Universal Life Insurance, you can get a free Universal Life Quote at our Universal Life Instant Quote Page or contact us at 1.866.899.4849.

avatar
Roger J
Roger J

I think Universal Life sales remain stagnant as long as rates remain this high. Companies have priced themselves out of market for average Canadians

LSM Insurance
LSM Insurance

Hi Roger you could be right. It will be interesting to see if rates go down once interest rates eventually rise and how long this will take

Peter
Peter

Does Assumption Life still offer a Universal Life plan – I have a plan I look out in 2006

LSM Insurance
LSM Insurance

Hi Peter,

They discontinued sale of this plan but it would not impact the plans that are already in place.

Catherine M
Catherine M

Level cost of insurance seems like a good plan for those who want a steady insurance cost. Between level cost and Hybrid Insurance which would you recommend is the better one??

LSM Insurance
LSM Insurance

Thanks good question. It really depends on the persons budget and needs, Level cost will have a high initial cost.