Close up on a file tab with the word life insurance, focus on the main text and blur effect. Concept image for illustration of family protection policy
© Le Moal Olivier / 123RF Stock Photo

One of the hardest jobs for a financial advisor is managing client expectations. We try our best to set reasonable assumptions and expectations but, as time passes, those assumptions may end up being too conservative or too optimistic. External factors can influence the performance of an insurance policy in ways we never envisioned.

The client profile

Take the example of an actual participating whole life policy issued in 1977 on a 34-year-old male non-smoker, with initial sum insured of $10,000. The policy is now part of a closed par block of the company’s business, since it demutualized in the 1990s. The base premium is $200 a year, and the client selected the dividend option of paid-up additions (PUAs). The policy offers no additional deposit option (ADO). Premiums have been paid when due, and no policy loans were taken.

Also, the policy has never been on premium offset. While premium offset offers the benefit of ending out-of-pocket premiums, the real value of a whole life policy for most clients is the ability to automatically purchase PUAs. After all, why use after-tax dollars to buy additional coverage when the policy can purchase the PUA on a tax-exempt basis? (Premium offset would also reduce the amount of PUAs that can be purchased since part of the credits are used to cover the base premium.)

When the client purchased the plan in the late ’70s, illustrations like those we use today weren’t available. Instead, advisors and clients referred to a table of guaranteed values and a general description that the policy would grow over time.

The challenge comes when the client reviews the in-force illustrations, which they’ve requested over the last few years. The illustrations show that the projected death benefit has been decreasing due to the prolonged low interest rate environment and subsequent decreasing dividend scales.

Click on the image to enlarge it.

At the client’s current age of 76, the death benefit should have been over $29,000 but is sitting at over $27,000 — about a 6% drop. That’s not too bad given low interest rates; however, the death benefit is projected to drop about 23% by age 90 when you compare the 2012 in-force quote to the 2019 quote.

Most surprising is the decrease in the projected death benefit based on the 2019 quote at −1%: the death benefit stops growing! It effectively looks like a T100 policy with cash value.

Why does the death benefit stop growing?

The dividend scale consists of the dividend scale interest rate plus the insurance company’s actual mortality, lapse, tax and expense experience. However, there is another factor not commonly known or discussed.

The death benefit has primarily stopped growing at that scale because the policy has a hurdle rate. If the dividend scale is below the hurdle rate, the policy will not purchase additional death benefit or build additional cash surrender value. Furthermore, the death benefit and cash surrender value have their own respective hurdle rates. While the guaranteed cash value would still increase as noted in the contract, the non-guaranteed portion wouldn’t.

The policy wasn’t built for this kind of interest rate environment. No one in the 1970s could have predicted that interest rates in 2019 would be this low. The hurdle rate built in to this par whole life plan is not disclosed in the contract or product guide; it is aligned with the actual interest rate environment and mortality experience at the time the policy was priced, with some conservatism built in. The pricing interest rate in the ’70s will be very different from the current pricing rate, which could be different in another five years.

Where do we go from here?

How do we, as advisors, effectively communicate the value of the policy even though the long-term death benefit is projected to stop growing? How do we manage expectations for this client and future clients with this type of uncertainty? Here are some attributes we can remind the client about:

  • The guaranteed cash value is still growing. A 2% increase would translate to an equivalent before-tax rate of return of 4% (assuming a 50% tax rate). You would be hard-pressed to find a 4% GIC today.
  • The company has already given the client significant value over the last 40 years with moderate volatility, and with low correlation to market risk. In fact, one could argue that the company gave too much too soon, so the client benefited sooner. Explain to future clients that getting a benefit now is better than waiting (present bias).
  • No one in the 1980s expected the high long-term interest rates to persist, so alternative investments that the client might have chosen, such as GICs and Government of Canada bonds, have also decreased proportionately.
  • If the client continues to pay, they won’t lose the cash value they’ve built thus far. Premium offset shouldn’t be considered at this point as it will decrease the total death benefit going forward.
  • The client’s estate is still expected to get far more than the premiums paid into the plan, resulting in a stable internal rate of return.

Now that we’ve communicated the value of the plan to the existing policyholder, it’s important that we periodically remind our clients about the guaranteed versus non-guaranteed (or variable) features of a whole life plan. The more knowledge we pass on, the more value we provide, while managing client expectations.

Table 1 summarizes some examples of the fixed and variable components of two types of whole life plans.

Table 1: Attribute list of par versus non-par whole life insurance

Attribute/feature Typical par whole life Non-par whole life
Guaranteed crediting rate formula No Yes
Guaranteed deposit load/premium tax for basic premiums No Yes
Guaranteed mortality/lapse/expense rates No Yes
Hurdle rate Yes No

The next thing to understand is how the whole life plan reacts to external factors, as shown in Table 2.

Table 2: Impact of external factors on par versus non-par whole life insurance

Scenario Typical par whole life Non-par whole life
Mortality experience worsens (from the opioid crisis, for example, or from rising suicide rates or the potentially negative experience from simplified/no-fluid underwriting) Cost to purchase PUA increases, and dividend decreases Cost to purchase PUA increases
Expenses increase Cost to purchase PUA increases, and dividend decreases No impact on credited rate
Lapse rates are worse than expected (i.e., more people keep their policies) Dividend decreases No impact on credited rate
Provincial premium tax increases Dividend decreases No impact on credited rate

Since the dividend is technically considered a premium payment, if provincial premium tax increases, it may lower the net single premium to purchase PUA in a par whole life plan. In a non-par whole life plan, there would be no change to the performance bonus/credit.

Also note that clients should consider the plans under different conditions. Rohit Thomas, chief product actuary at BMO Insurance, notes that “whole life policyholders take on risks that are difficult to quantify due to the pooling of risk. As such, policyholders should stress-test the differences between par or non-par whole life policies under various scenarios to be sure they meet their expectations.”


If the industry (insurers and advisors) can do a better job managing expectations, and can clearly explain how the product functions, advisors can do a better job at recommending customer-centric solutions to address the permanent insurance needs that Canadians require to help them achieve their estate planning goals.

Pierre Ghorbanian, MBA, CFP, FLMI, is the Advanced Markets Business Development Director at BMO Insurance.