Premium rates for guaranteed life insurance products, which already have increased by 8%-10% this year, recently have been boosted by up to 12% by some insurers. Another wave of premium hikes is expected to hit next spring.
This may sound like bad news for sales, but it represents an opportunity for financial advisors to make a case for clients to lock into guaranteed premium-rate products today before the anticipated increases next year.
Toronto-based Manulife Financial Corp. and Kingston, Ont.-based Empire Life Insurance Co. , as well as a slew of other insurers, have boosted premiums for products such as universal life and whole life insurance. Manulife had increased its premiums by 10% in December 2010 and then announced another rate increase of 7%-12% on its universal life products, effective Oct. 15.
Empire Life, which had boosted its rates on life products by 6% in February, has introduced another increase of 3.5% effective Oct. 1.
More increases are likely to occur again in the spring, says Peter Wouters, director, tax and estate planning and retail insurance products and marketing, for Empire Life: “Prices need to rise by at least 30% for these products to be profitable again. But a company is never going to hike up the price like that all at once.”
The culprit is prolonged low long-term bond rates, which have been punishing the investment returns of Canadian insurers, says Paul Fryer, vice president, individual insurance, with Waterloo, Ont.-based Sun Life Financial (Canada) Inc. : “With permanent insurance, premiums are invested for long periods of time. [And] the lower the interest rates on these investments, the lower the returns and the higher the cost of permanent insurance.”
The yield on long-term bonds, such as a 30-year Government of Canada bond, has fallen to about 3.5% from 8% in the mid-1990s.
Although factors such as increasing policyholder longevity and technology improvements have helped lower policy premiums to some degree, their impact hasn’t been strong enough to offset the decline in interest rates, adds Fryer: “Today’s low interest rates and outlook for continued low interest rates will to lead to higher prices in the market.”
The premium hikes may seem steep, says Wouters, but they are the result of insurers suppressing the level of guaranteed premiums for almost a decade.@page_break@For example, when guaranteed premiums were introduced in the mid-1990s, the yield on long-term bonds were about 8%. Although insurers thought that return would rise to 11% — its level in the early 1990s — it dropped. However, insurers didn’t move to increase premiums at the same time.
“Everyone was terrified if you didn’t go with the pack, you would be left on the sidelines and advi-sors would abandon you,” says Wouters. “It wasn’t clients saying, ‘This is too expensive.’ It was advisors saying, ‘This insurer offers this cheaper. I’m going to go with them’.”
Today, it’s a “reverse game of chicken,” adds Wouters. “Companies have a fair idea of where pricing needs to go, but don’t want to raise them out of sync with each other.”
This is why it’s a good time for advisors to suggest participating whole life policies to clients, which allow the policyholder to share in the dividends of a company, says Nathalie Tremblay, health products manager, individual insurance, with Desjardins Financial Security of Lévis, Que. Participating products pay out dividends based on the company’s earnings.
“If a company experiences better returns as the interest rate rises,” Tremblay says, “a client is well positioned to share in those profits.”
Regardless of which products advisors recommend, rising premiums should not be looked at as a negative, she adds: “As long as low interest rates continue, any guaranteed product a client buys today will be cheaper than one [he or she] buys tomorrow.”
In an effort to lessen the impact of today’s premium hikes, some insurers, such as Empire Life, are toying with the idea of reintroducing adjustable rates on their permanent products. For an adjustable-premium policy, if interest rates rise, premiums decrease.
Insurers are hoping a revamped version of an adjustable-premium rate policy will change the bad rap the products got in the 1980s, when they were first introduced. When adjustable-rate products first came on the market, the expectation was that the yield on long-term bonds, which was about 11% at the time, would increase.
It did just the opposite. By the late-1990s, the return rate had collapsed to 5% — and clients ended up paying much higher premiums, says Byren Innes, senior vice president and director of insurance industry consultancy NewLink Group Inc. in Toronto.
“You had people paying double, triple and quadruple their premiums,” says Innes, “which resulted in every single insurer pulling the product off their shelf.”
Today, the tables have turned, he adds: “It’s unlikely that interest rates will fall much further. Therefore, if a client opts into a variable rate product today, they will most likely experience lower premiums later on.” IE