Special Feature

A permanent choice

Part one of this three-part series on permanent life insurance highlights evolving tax rules and other factors leading to changes in permanent insurance products. Part two, on Thursday, outlines sales strategies for advisors, and part three, on Friday, compares universal life and whole life. Photo copyright: flynt/123RF.

Products

Consider cost and a client’s desire to be involved in the investment process when helping to choose a type of coverage

By Megan Harman |

The world of permanent life insurance can be intimidating territory for clients, and so advisors have a key role to play in helping them determine the type of coverage that's best for them.

Universal life (UL) and whole life (WL) each have their advantages and drawbacks, according to Trevor Parry, president of TRP Strategic Consulting and a partner at Parry McCone, a Toronto-based planning and strategy firm. Identifying the product best suited to a particular client, he says, requires an assessment of the client's individual needs and goals.

"Consider why the client is doing this," Parry says.

In the past few years, sales of WL have outpaced UL considerably. Between 2011 and 2014, new premiums on WL policies in Canada grew to $611 million from $361 million, whereas new premiums on UL policies fell to $406 million from $669 million during the same period, according to figures from Investor Economics' Insurance Advisory Service.

The trend has been driven largely by sustained low interest rates, which have driven up premiums on UL policies to a greater extent than WL.  "UL is certainly more interest-rate sensitive," says Parry. "We've seen the effect on premiums there."

Elevated market volatility has also played a role in driving investors towards the relative safety of WL. Whereas clients with UL must choose the investments they'd like to hold in the cash component of their policy, and assume any risk associated with those investments, clients with WL have the cash component of the policy invested in portfolio that is conservatively managed by the insurance company.

"If clients take a strong equity position in the investment component of [a UL] policy, there is risk," Parry says.

Although UL has been hit harder by the low interest rates and market volatility, however, WL hasn't been entirely sheltered either. The dividends that policyholders earn on participating (par) WL, in particular, have declined considerably.

"[WL] is not immune," Parry says. "Returns are down because the dividend scale is down."

Relative to other types of investments, however, the returns on WL policies tend to be much more stable over time. "If you look at most WL policies in comparison with the volatility in the market, I think a lot of clients are very happy," Parry says.

For risk-averse clients who like the idea of this kind of stability within their investments, WL is likely the best option. Clients who are comfortable taking on more risk, on the other hand, might prefer UL.

In addition to risk tolerance, it's important to consider the extent to which clients want to be involved in the investment process, says Helena Smeenk Pritchard, who provides life insurance sales coaching and training with Helena Smeenk Pritchard & Associates in London, Ont. UL tends to have appeal among clients who want a hands-on approach to their investments, and can choose their own investments.

In contrast, clients with WL can take a hands-off approach. Ask clients how much time they're prepared to spend monitoring the investments inside the policy to determine whether or not UL would be an appropriate option for them, Smeenk Pritchard suggests.

"If you're comfortable letting the professional money managers at the insurance company handle it for you," she says, "whole life gives you peace of mind to be able to put it in a drawer and forget about it."

Cost is another factor to consider. Although low interest rates have forced carriers to raise the premiums on UL to a greater extent than WL, WL still remains the costlier option for clients. Consider what clients can realistically afford to spend on premiums long-term when helping them choose an appropriate type of coverage, says Smeenk Pritchard.

"I don't believe an advisor does any client any favours by selling a policy with a premium that the client is not going to be able to afford in the long run," she says.

This is the third article in a three-part series on permanent life insurance.