The equity markets of the past four years plus the prevailing low interest rate environment have combined to have a dramatic effect on the Canadian life insurance industry. What this means for consumers is that many of the products that are currently being used for effective estate plans and long term financial planning may soon no longer be available, or if they are, they will be priced significantly higher than they are today.
The four primary factors that enter into the pricing of a life insurance product are mortality, expenses, persistency and investment returns. It is the latter that is of considerable concern to the life companies. Recently, long bond rates fell to the lowest rate seen in 100 years. The United States hit a 150 year low. The reserves that the insurance companies have to maintain are long term investments of the insurers, thus, with low returns, rising insurance premiums are the result. As if this wasn’t enough, the Canada Revenue Agency is currently reviewing ways in which to increase their revenues derived from the taxation of life insurance companies.
Added to the pricing issue is the length of time that the premium will be guaranteed. Permanent insurance products, such as Term Insurance to Age 100, or level cost of insurance embedded in a Universal Life policy, are becoming of great concern to the insurers since low interest rates combined with the required reserve requirements will render these products unprofitable. At a recent Conference of Advanced Life Underwriting (CALU) held in Ottawa, more than one company official predicted that within the next few years guaranteed level cost of life insurance (level fixed premium to age 100) will no longer be available.
For those closely familiar with the life insurance industry this should not have come as much of a shock based on recent developments. Many insurance companies have altered the investment products (Segregated Funds) that they offer by withdrawing the 100% maturity guarantee available in these products leaving only the 75% minimum guarantee. For those that still provide the 100% guarantee the cost of these products has increased. In addition, in many cases the available investment choices have been limited to more conservative investment portfolios. Also, some companies have opted to discontinue sales of their Guaranteed Minimum Withdrawal Benefit Plans (GMWB) and for those that remain the benefits have been reduced.
Recent years have witnessed some remarkable announcements. As of January 1, 2012 Standard Life Assurance Company ceased selling all of its life insurance and critical illness products. Standard Life now only offers new sales in investment products. Subsequent announcements indicate that they may not be the only life company assessing whether or not they can sustain both life and investment products. RBC Insurance recently announced that they are suspending sales of Term to 100 and Universal Life products as well as withdrawing for sale both long term critical illness and long term care coverage. Although both companies are retaining the existing life insurance products for conversion of term insurance only, the premiums for the products have increased.
In June 2012, Manulife increased all their level COI insurance rates. This increase, which averaged in excess of 6%, was their second increase in a year. Recent increases also extend to all of their critical illness policies as well. Industrial Alliance also followed suit and announced an increase in all of their Guaranteed Term 100 rates in mid-2012. While Manulife was the first company to start increasing long term premiums, most companies offering this type of product have or are expected to announce their increases very soon.
All of these changes will have a tremendous impact in certain areas of both corporate and estate planning as well as long term financial planning. While the following strategies will most likely still continue to be viable in the future, the general consensus is that they will not be as cost effective as they are under today’s pricing and with the current product availability. The strategies that will be affected by the price increases and product withdrawal include the following:
Personal and Corporate Estate Planning
First and Joint Second to Die Life insurance for Capital Gains tax
- Redemption of preferred shares using life insurance in estate freezes
- Estate Equalization
- Trust revocation and variance
- Capital Dividend Account planning
- Providing for estate liquidity needs at death
- Asset Allocation strategies
Individual Financial Planning
- Insured annuities
- Triple back to back arrangements
- Charitable insured annuities
- Guaranteed Minimum Withdrawal Benefit plans
Going forward there will still be permanent products, such as Whole Life, for estate and long term planning purposes and the premiums for this product have not increased. Level cost term and Universal Life policies, however, have often been the product of choice due to their relatively low fixed cost.
The message is clear, anyone who is considering their options with respect to strategies that utilize Term to 100 or level cost of insurance products should do so as soon as possible. The window of opportunity for these types of products is closing quickly, if not abruptly.
Call me to discuss how you can secure today’s guaranteed rates for your future needs.