Canadian insurers have gone through two rounds of price increases since December 2010. Does pricier insurance still make sense for clients who want to leave legacies?
Rob Salvucci, CLU, RHU, FLMI, Director, insurance and estate planning, The Williamson Group.
Stance: Being uninsurable is a bigger problem than pricier insurance
The age factor
Declining interest rates are the fundamental reason insurance companies have raised premiums on Term-to-100 products. It’s a balancing act for insurance companies; they need to remain competitive yet financially viable.
The average increase in pricing is 10%, but that fluctuates based on age demographics. Over the last two years, younger age bands may have experienced up to a 20% increase in premiums, while for clients fifty and older—who make the bulk of estate planning purchases—the impact hasn’t been as dramatic. They may have experienced no increases, or nominal increases.
Term insurance is a more cost-efficient option for younger clients. But as age increases, so does the cost of insurance. People trying to wait out this period of rock-bottom interest rates need to be equally concerned about protecting their insurability.
Insurance isn’t a commodity clients can get in and out of at will. Clients must qualify medically to be insured. In most cases, the cost of waiting—even two or three years—might prove pricier than the price increase. Besides, even if interest rates start trending up, there’ll be a lag before current fixed-income investments mature and can be reinvested at higher interest rates.
Mortality trumps markets
If insurance is a suitable tool for a client, I wouldn’t recommend waiting for the market to turn. A greater risk than uncertain markets is a client experiencing poor health that makes him or her uninsurable. Worse still would be unexpected death or unforeseen critical illness or disability and no insurance proceeds or payments for dependants.
Many financial planners tend to focus too much on the accumulation side. They come up with great offensive strategies but don’t temper them with proper defence. Life can throw curves at us, in the form of critical illness, disability or premature death. It’s important to understand what the impact could be to your long-term plans.
I try to educate younger clients about the evolution in their needs — from temporary to permanent. In most cases, it might not be appropriate to jump into permanent options for clients who have competing interests and a tough time balancing budgets.
I’d advise them to start with short-term solutions that can ease into long-term estate needs. Term insurance could do the job of providing less expensive coverage and, most importantly, guaranteeing future insurability.
It’s important to confirm the term insurance product selected is convertible to permanent options without having to re-qualify medically. To get the best value on the client’s conversion privilege, you also need to determine whether the provider offers strong permanent solutions in addition to competitive term products.
Life insurance provides a whole realm of possibilities in estate planning. The basic approach is to provide liquidity at the time of death to pay debt, replace family income or provide cash to pay taxes that are triggered by death.
Even if you have the net worth to pay estate and probate taxes, it can still make sense to buy insurance. In a joint last-to-die policy, the death benefit can be delivered for pennies on the dollar.
Let’s assume a husband and wife are both 65, and have a tax liability of $1 million, which they want to pay in the most cost-efficient manner. For about $18,000 a year (on a joint life expectancy of 25 years), they can buy $1 million of joint last-to-die coverage. For a total projected outlay of $450,000, (25 years x $18,000) the couple’s estate will receive $1 million tax-free.
From an investment perspective, at life expectancy of 25 years, the internal rate of return on the premiums paid is 5.7%. Because it’s received tax-free, that’s the equivalent of earning 10% to 11% pre-tax in an outside investment, on a guaranteed basis (assuming the client is at the highest marginal tax rate). Compare that to today’s fixed-income markets, where it’s impossible to secure 9% or 10% rates of return on a guaranteed basis without taking on significant risks.
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