The permanent life insurance landscape is undergoing a transformation, with factors such as low interest rates and changing tax rules forcing carriers to tweak the products they offer.
The result is a product that has become more expensive, offering lower returns than previously — and it will soon have less generous tax benefits. Despite the changes, however, the unique combination of lifetime insurance coverage and tax-advantaged investment room available through permanent life insurance continues to have strong appeal among many advisors and clients, particularly in the high-net worth marketplace.
"Insurance is really the last game in town in terms of large-scale tax deferral," says Trevor Parry, president of TRP Strategic Consulting and a partner at Parry McCone, a Toronto-based planning and strategy firm. "There have been a number of changes…but clients [who buy permanent insurance] are still way further ahead."
Statistics show that Canadians are certainly still buying permanent life insurance. In 2015, new premiums of whole life policies in Canada grew by 13%, and universal life premiums grew by 8%, according to Windsor, Conn.-based global insurance association LIMRA International Inc. Sales of both products outpaced those of term life insurance, which saw new premiums grow by 7% in 2015, according to LIMRA.
"There is a ton of permanent insurance being sold right now — huge face amounts," says Helena Smeenk Pritchard, who provides life insurance sales coaching and training with Helena Smeenk Pritchard & Associates in London, Ont.
The growth in permanent policies comes despite a variety of headwinds facing these products, including sustained low interest rates. By driving down the returns that insurers are able to earn on the premiums they invest, low interest rates have forced companies to raise premiums on permanent policies considerably in order to cover future claims.
"The prolonged low interest rates are making the whole business more expensive," says Byren Innes, senior strategic advisor, financial services consulting and deals with PricewaterhouseCoopers LLP in Toronto.
The escalating cost of permanent coverage has cut into sales slightly, according to Innes. "It has [affected sales], but it hasn't been dramatic," he says. Most clients getting a quote on a life insurance policy aren't aware of what that same policy would have cost five or 10 years ago, Innes notes, so the price changes aren't necessarily noticeable to consumers. "People are just paying more for their insurance," he says.
The low interest rate environment has also had implications for the returns clients are earning within the cash portion of their permanent insurance policies. The dividends that policyholders earn on participating ("par") life insurance policies, for example, have declined considerably as low interest rates have weighed down the returns that insurers are earning on investments within their par accounts.
That trend is likely to continue, given the tough investment environment, Parry says. "The dividend scale is likely to continue to compress over time."
Permanent insurance products are poised to change even more in the coming year. Looming changes to the rules governing the amount of tax-exempt savings room in permanent life insurance policies – known as the ‘exempt test' – will reduce the tax benefits associated with these products.
"There was a great deal of trepidation in the industry as to what this meant," says Parry.
Most policies purchased prior to the January 2017 changes will be grandfathered. Clients who purchase permanent coverage after that time will have less flexibility to accumulate savings in their policy on a tax-exempt basis.
"You tend to see a reduction in the later years of funding the policy, and how much you can get into the investment component of a policy," says Parry. "If clients are looking for the ability to shelter a lot of money, that's going to be reduced."
Insurance companies will be forced to make changes to their permanent products in order to adapt to the new rules, according to industry executives who spoke at the Canadian Association of Independent Life Brokerage Agencies' national conference in Niagara-on-the-Lake, Ont. in late March.
"The products are going to change — some more than others," said Dean Chambers, vice president of individual insurance at Toronto-based Sun Life Financial Inc.
Despite the changes, Chambers said permanent insurance would continue to be an attractive planning tool for advisors and clients.
"Permanent insurance is going to continue to work fine. Insurance is still insurance; the need is still the need," said Chambers. "The concepts, or strategies that we all use are going to continue to be appropriate."
Up next: Strategies for positioning permanent life insurance