Insurance: Low rates hit policies

In late June, for example, Kingston, Ont.-based Empire Life Insurance Co. announced that it would close one of its UL products, Trilogy Plus, to new sales. The product had different investment options compared with Empire Life’s basic Trilogy UL product, including higher levels of guaranteed investment returns for the Plus policies. The low interest rate environment has made those guarantees unsustainable, according to Mike Stocks, vice president, insurance marketing, with Empire Life.

“Our guaranteed interest rate, because we hadn’t repriced it, was outperforming some of the GICs on the market,” says Stocks.

Empire Life continues to offer the Trilogy UL product and plans to introduce a new UL product to replace Trilogy Plus in the months to come, Stocks says.

Low interest rates have affected all permanent life insurance policies in the past few years, but UL has been affected to a greater extent than whole life because insurers face steeper capital requirements on UL policies. As a result, insurers have been forced to take such steps as dialing back investment guarantees and raising premiums on these policies.

“The sustained environment of low interest rates, and the ups and downs of the financial markets, don’t allow for the sort of guaranteed returns in a UL policy as people enjoyed 10 years ago,” Stocks says.

These adjustments have made UL products more expensive and less appealing to investors, and the result has been a considerable drop in UL sales. New premiums in UL tumbled to $406 million in 2014, down by 39% from $669 million in 2011, according to figures from Toronto-based Investor Economics Inc. Over the same period, new premiums in whole life policies jumped by 69% to $611 million from $361 million.

“We’ve seen a very big substitution away from universal life into whole life policies,” says Karol Kalejta, senior analyst with Investor Economics. “That’s largely driven by the price increases that we’ve seen in universal life.”

Although the cost of whole life policies also has increased, these policies come with more stable returns that appeal to investors, particularly during periods of market volatility.

“Clients already get that volatility in their investment portfolios,” says Benjamin Reed-Hurwitz, analyst with Investor Economics. “So, there’s a desire to go with a product that’s a little more stable, like whole life.”

Although UL sales have been on a downward trend for several years, new premiums ticked up slightly by 2.9% in 2014. That may signal some renewed interest in UL, according to David Baker, assistant vice president, insurance products, retail markets, with Toronto-based Manulife Financial Corp.

“There seems to be a bit of momentum picking up in universal life sales over the past few quarters,” he says. “I expect that we’ll see some of that momentum continue.”

Manulife launched a new suite of UL products last year, which helped the company increase sales in that product category. In an effort to drive sales further, the company recently lowered the minimum issue ages by 15 years on its level cost of insurance UL policies, making single-issue policies available to clients as young as 30 years old.

“We were getting a lot of requests, a lot of demand to make a level cost of insurance offering available to younger ages,” Baker says, “so, that’s what we did.”

Given the continued popularity of whole life, however, Manulife is not neglecting that part of the market, Baker says.

“Whole life continues to be the strongest segment in the permanent life insurance space,” he says. “We’re making some additional investments in our whole life portfolio.”

Other insurers are taking similar steps to enhance their whole life offerings and to make them more flexible and affordable for clients. Toronto-based Foresters Life Insurance Co., for example, launched a new participating whole life insurance product in January called Advantage Plus. It features optional term insurance riders, which policyholders can use to enhance their coverage to meet short-term protection needs in an economical way.

Empire Life also launched a new participating whole life product in January, called EstateMax, which enables policyholders to increase their coverage over time by reinvesting the dividends they receive from the policy.

“The extended low interest rate environment that we’ve been experiencing in Canada has made some whole life insurance plans become unaffordable for many Canadians,” says Stocks. “Our objective with launching EstateMax was to come out with a product that would be more affordable by using this combination of dividends and cash values to maximize death benefits for policyholders.”

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