Whole life on the comeback trail

By Mark Noble | April 7, 2009 | Last updated on April 7, 2009
5 min read

This downturn has proven that insurance companies are not immune to market conditions, but some of the old standby insurance products — most notably whole life — are seeing a resurgence in sales.

Advisors who offer comprehensive financial plans need to find ways to generate revenue, and by many accounts, investments are not fitting the bill right now for clients. Insurance is a natural alternative use for new client money.

Protection products are an easier sell right now because many clients have had their risk assumptions turned on their head. In many cases, clients may be more comfortable deploying money into protection rather than equities.

“If you’re a certified financial planner, it’s your obligation to cover off three bases. The first is protection — making sure your client has adequate insurance coverage such as disability, life and long term care. Then, there is managing savings, which is doing things like making sure you’re client is paying down debt. The third step is investments,” says Anthony Windeyer a Richmond, B.C.-based CFP with Coast Capital Insurance Services. “During the good times, people want to go to step three before doing one and two.”

Windeyer, who is currently in Montreal for the World Critical Illness Conference, says one of the key themes he’s hearing from fellow advisors is that there is a silver lining to this downturn.

“It really seems to be that the more market fluctuations we see, there is a back to basics movement,” Windeyer says. “It’s a good time to make sure clients have all the insurance they require. One of the benefits of all the market fluctuation, is clients recognize what they should have been doing all along. They have developed a more sincere understanding of their financial planning needs.”

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    According to LIMRA international, the fourth quarter of 2008, marked the single sharpest decline in premiums since the fourth quarter of 1951, as both universal life and variable life policies posted substantial decreases. However, whole life premiums grew by 7% in the fourth quarter alone, which marked the worst of the market downturn.

    It’s likely not a coincidence. Unlike more common term life policies, whole life offers growth potential on the premiums. In addition to life coverage, investors get a steady rate of return on their policy.

    With a strong contingent of holdings in high interest, long-term bonds held over from higher interest periods, the performance on whole life has been steady — and even more importantly for many clients — guaranteed.

    Against a backdrop of double-digit losses in the equity markets, whole life policies offer a relatively low-risk rate of return that looks quite good. Windeyer says the whole life policies he’s been selling have been generating returns around 7% to 8%.

    “[Whole life] never went out of style with me, and I’ve been in this business for 15 years,” he says. “Life insurance has specific situations where it is needed. If I have clients with not a lot of RRSP room and a free cash flow, I will look at monthly premium payments on life policies. Whole life is great product; in my opinion the only reason it got a bad name in the past is it was sold to somebody who should have gotten term life based on their specific insurance needs.”

    Bruce Cumming, CFP and president of Cumming & Cumming Wealth Management in Oakville, Ontario, warns against buying whole life based on the return potential alone.

    “I’m concerned advisors are likely selling illustrations of [whole life investment returns] than selling anything else. The whole life investment pool is a black box and you really don’t know how well it will do in the future. Particularly so if that whole life pool owns a lot of long bonds that are going to be maturing over the next several years,” he says. “They will not be replaced by 8% or 9% coupon bonds. The risk of whole life is the ongoing sustainability of the current dividend payout rate of the policy may greatly diminish over 30 years, the traditional lifetime of one of theses policies.”

    Cumming also points out yearly renewable term rates apply to whole life polices, meaning the insurer can raise premiums as the client age and risk increases. As clients age they could find themselves paying more for less. This increases the liability of the advisor who sells the policy based on certain return assumptions.

    The lack of flexibility is why is why Tina Tehranchian, a CFP with Assante Capital Management in Richmond Hill, Ontario, doesn’t sell whole life. If she has a client where permanent insurance makes sense, she says her preference is for universal life. For example, carriers will not terminate a UL policy immediately if the client doesn’t pay their monthly premium. This means small business owners and other self-employed individuals can ride out a shortage of cash flow in a downturn, and still have life coverage.

    “Personally, I believe the number one function of a life policy should be protection. Depending on the tax bracket and cash-flow situation, permanent insurance may make sense,” she says. “My main issue with whole life is the lack of flexibility in the early years. For business owners that don’t have a dependable cash flow that can be a big drawback.”

    The ability of the advisor to choose the underlying investment of UL also has its advantages. For example, a client can select guaranteed investments to provide a yearly return that will “self-fund” the policy, so they don’t have to pay any more premiums. With whole life, the client may see a reduced rate of return, depending on the performance of the insurer’s underlying portfolio.

    Cumming points out that either way, the return will likely be very conservative.

    “UL is very flexibly because you can choose your investment type. It’s the opposite with whole life, where the insurance company manages your investment on your behalf,” Cumming says. “Again it all comes back to the illustrations the advisor uses to sell the product. [If you promise the wrong rate of return] you’re giving yourself rope to hang yourself with. If I sell UL, a 6% rate of return doesn’t seem unreasonable, but you need to point out to the client after the management expense ratios and investment income tax, perhaps a more reasonable rate of return is 4%.”

    (04/07/09)

    Mark Noble