There’s nothing like good a dose of market volatility to focus the minds of clients on risk management. While there are limits to the amount of protection you can place on their investment portfolios, the risks in their overall financial plan can be addressed with insurance.
The downturn has reminded many investors about the benefits of having a backup plan and as a result we’re seeing a return to products that embrace certainty over speculation.
John Novachis, president of IPC Investment and IPC Securities, says he’s seen a recent shift into permanent insurance, particularly whole life, which he believes is likely to continue.
“There has been a growing trend back into permanent insurance, though term insurance continues to be the dominant product. There has been a reduction in the amount of universal life sold and that has largely been because many policies were linked more than everyone wanted to market performance,” Novachis says.
A large portion of new insurance sold is coming from the offices of advisors who are increasingly being asked by clients to provide them with in-depth risk planning above and beyond the usual portfolio management.
“The thing we’re seeing is that more and more of our advisors are performing risk management reviews with their clients,” Novachis says. “The risk that used to be based solely on portfolios has broadened into risk management of an individual’s entire affairs.”
Dave Velanoff, CEO of MGI Financial and senior advisor to the president at Desjardins Financial Security, suggests that not only are advisors doing more risk management these days—its a priority.
“More and more advisors are getting into full service financial planning as opposed to just selling a product. It’s very difficult right now to get people to invest in the marketplace, so advisors need to look at the risk management side of their client’s portfolio,” Velanoff says.
While critical illness insurance has been selling very well since the downturn because of its cheaper price tag, Velanoff warns advisors against focusing too much on niche products at the expense of the bigger insurance picture. After all, if a young executive is killed in a car accident and all he or she had was critical illness, the family gets nothing. Worse, they might even sue the advisor for not having put life insurance into the picture.
“What worries me is that people are selling things that are easier to sell; but we have to be careful to not mix up our priorities. People have to take care of their families first, the priority should be life insurance,” Velanoff says.
It’s no surprise that during lean times and rocky markets, guaranteed investments are at the top of many investors’ minds, with segregated funds enjoying a renaissance.
“Segregated fund sales are booming and a lot of that has to do with the current climate. A lot of clients are looking at the guarantees these funds provide,” Velanoff says. But he believes that boom is unlikely to continue for long because rates are currently undervalued.
“I think segregated funds are going to get priced to a point where they’re not as competitive as they are today,” he says. “I don’t think insurers will be able to take the risk.”
Allan Bulloch, president of IPG Insurance, says the continued low interest rates in the bond market will push insurance companies to raise rates in general.
“The biggest thing right now is the long-range interest rates insurance companies have been dealing with,” he says. “Investment choices for insurance companies are down because of record low bond prices. I expect to see further price increases in products.”
Manulife Financial increased their level cost of insurance rates on universal life policies on October 15, and all insurance companies have announced first and second waves of rate increases to compensate for challenging market conditions. As a result, some people have been shifting into permanent insurance to cherry-pick the current low rates.
“With the level cost of insurance price increases that went on this year, we’re seeing some more conversions of term insurance to take advantage of the slightly lower prices before the level cost of insurance increases further,” Bulloch says.
In any case, Novachis says insurance is definitely becoming a crucial topic for advisors to master because of its growing relevance to their clients’ portfolio strategy.
“We’re seeing a trend where insurance is being discussed more by advisors due to risk management becoming more crucial, and if we continue to see financial planning being recognized as a profession, advisors will be a big part of that,” Novachis says.
Raf Brusliow is a Toronto-based financial writer.