As premiums for whole life rise steadily, it can be challenging to convince clients that the costs of this type of policy often are justified. It's important, however, to make sure your clients don't take on a policy they can't afford over the long term

By Megan Harman | September 2013

As long-term guaranteed insurance products have become increasingly costly, mostly due to rock-bottom interest rates, many clients are turning to term insurance. But permanent life policies continue to play an important role in the financial plans of many Canadians, and experts say that by better explaining this role, financial advisors can bolster their sales of this product.

"We know there's a need," says Sean Kilburn, senior vice president of life insurance with Kingston, Ont.-based Empire Life Insurance Co. "You could go into almost any household in Canada and know that they're underprotected. The challenge is: what level of future premium commitments can that consumer take on today and in the future?"

Universal life policies with a level cost of insurance, in particular, have undergone several rounds of price hikes in the past couple of years as insurance companies grapple with low interest rates that have squeezed profitability.

As a result of the repricing activity, clients looking for new life insurance increasingly are opting for renewable term policies. Although term policies suit the needs of many clients, and are more affordable, you should ensure that your clients aren't ignoring permanent insurance as an option based purely on its higher initial price.

"There are tons of benefits associated with permanent insurance," says Brian Shumak, an independent financial advisor and owner of Brian Shumak Financial Services in Toronto.

Although term insurance is considerably less expensive in the early days of the policy, Shumak points out, it can become prohibitively expensive upon renewal. In contrast, permanent insurance policies generally come with level premiums. When taking inflation into account, the premiums actually become more affordable over time, he argues: "You really have a decreasing premium, as opposed to an increasing premium. Permanent insurance is definitively more cost-effective in the long term than term insurance."

Some permanent life policies also offer the option of fully paying up the premiums over a specified period of time."That means [clients are] not continually paying for life, if they have the financial wherewithal to do that," says Shumak. "Then they don't have to worry about insurance premiums in retirement, and [the coverage] is still there."

Clients with permanent policies also benefit by building up the tax-sheltered cash value within the policy, a feature that can be attractive to clients who have maxed out their registered savings accounts.

Highlighting some of these benefits can help your clients recognize the value in paying the higher premium for a permanent policy. Many insurers offer software and other tools that show how much cash can build up in a policy.

Whether or not your clients opt for a permanent policy is likely to depend on their income, and on their priorities. Says Mimi Lee, an independent insurance advisor and owner of TruFinancial Consultants in Markham, Ont.: "It all comes down to whether people can afford it, and whether they want to commit."

Younger clients often are more inclined to postpone the purchase of permanent insurance, given the other demands on their income. Educating these clients on the amount they can save by locking down the policy while they're young, however, can motivate them to buy a permanent policy.

Whichever type of policy your client chooses, it's critical to ensure that the premiums will be affordable over the long term, says Kilburn: "The last thing you want to see is someone making a very strong financial commitment for one year that really can't be supported. Then, if the plan unwinds after a year or two, that hasn't helped the long-term needs of that customer."

Shumak recommends beginning with an assessment of how much coverage the client needs and, based on that, assess what type of policy the client can afford. Avoid pushing your clients toward a permanent policy unless it's clear they can afford it.

"I sell to meet the person's needs," Shumak says, "and then I address within their financial capability whether it's a permanent or a term program. The onus is on the [client] and the advisor to make sure they have enough coverage in place first, and then to look at whether [the client's] budget can accommodate permanent."

Shumak believes it's a good idea for all clients to have at least some permanent insurance for final expenses. Those who might struggle to afford a large permanent policy could purchase a smaller one, then top up their coverage with a term policy.

"Take a base permanent coverage that will remain with [the client] ad infinitum," Shumak says, "and then take the remainder in term insurance to make sure that [the client's] needs are met along the way."

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