While the use of universal life (UL) insurance policies in financial planning has declined in recent years, 1 there are still many situations where UL insurance can be a great way to meet client needs.
We talked recently to James Deakin – Assistant Vice President, Insurance Distribution for Sun Life Financial – about permanent insurance trends and the role that UL insurance continues to play as part of the financial planning process.
- Sales of UL insurance have declined significantly over the past five years.1 What are the factors behind this change?
I believe there are two possible factors that have contributed to the decline in sales. The first is the continued low interest rate environment. If clients are relying on the guaranteed investment account option within the universal life (UL) insurance policy, they’re getting a return that’s less appealing than it was 10 years ago. And when you compare today’s guaranteed returns to the dividend scale interest rate on participating policies, you can see why today participating policy sales are stronger across the industry as a whole.
The second possible factor behind the decline is that the industry has seen several Level cost of insurance re-pricings over the past seven to eight years, which have increased the cost of insurance. So, industry experience is that UL insurance policies have also become less attractive from a cost standpoint.
- In what situations is UL insurance not just an option, but a preferred option for permanent insurance?
To me, there are several situations in which UL insurance might be a “go to” option for permanent insurance.
The first is when a client needs and values flexibility for the payments into their policy. They know their cash flow is likely to change, and they want the flexibility to ramp their payments up or to pare them down.
Another situation is when the client is interested in an insurance policy in which they, with the help of their advisor, can manage their investments within investment account options. With a participating policy, there are expertly managed investments, but there’s no choice. With a UL insurance policy, the client can actively manage their investment risk with guaranteed investment accounts, links to well-known mutual funds, as well as a number of portfolio accounts.
Finally, if the client needs permanent insurance, and is only interested in the protection of a lump sum death benefit (not the cash surrender value), they could get this in a cost-efficient way with a UL insurance policy with a level cost of insurance and no cash value.
- What about business owner clients? Can UL insurance play a role for them?
Absolutely. One situation that I’ve seen many times is where there is a need for permanent insurance, but the client – or their accountant – doesn’t want to increase the value of their business assets, which ultimately will impact the value of their shares. By having the business hold a UL insurance policy that’s intentionally funded to have a minimal cash value, you don’t increase the value of business assets, and actually may decrease them. The business owner maintains their investable assets elsewhere.
That’s just one example – there are many situations where a UL insurance policy can play a role in tax or estate planning where a business is involved.
- Do you think some advisors feel more comfortable selling only one type of permanent insurance?
I believe it’s possible that some advisors have a greater comfort level with one type of insurance, and with the benefits it offers to clients. This is sort of like how many car owners are comfortable with a particular brand of car. If you’ve always owned a Honda, for example, you’re comfortable with the way it drives, how the controls are laid out, where the blind spots are and how the servicing works. If you suddenly switch to a Ford, you’ll be on a learning curve until you become comfortable with the different ways that brand of car operates.
Permanent insurance is much the same. You’re dealing with a different type of policy with a significant number of customization options available to meet specific client needs, so there’s a learning curve involved. And that takes time.
That said, there are plenty of advisors who have overcome that hurdle and committed the time to understand and offer the full range of permanent insurance products.
- How can advisors benefit by selling both types of insurance?
To put it simply, you can work with a broader range of clients because you’re able to meet a broader range of client needs. Rather than trying to fit a client’s needs into a product, you’re able to put the client’s needs first and provide options to match.
Also, one of the risks from an advisor standpoint is that there’s a lot of information out there and today’s consumer is more informed than ever. If you don’t present all the options, they may learn about an option you’ve omitted and take their business elsewhere. I’ve seen it happen many times.
- Some advisors have a perception that UL insurance is risky. Is that true?
The perception is definitely out there, but it’s really up to the client and the advisor as to how risky the policy can be. If you invest the entire account value in equity-linked investments, absolutely it can be riskier. But you can reduce the risk through strategies such as investment diversification, or by ensuring that the portion of the account value designated to cover the insurance cost component is invested conservatively.
Our organization has also taken steps to help advisors manage policy risks. On the investment side, we’ve introduced the Sun Life Diversified Account, which smooths returns and provides a guarantee that returns will never be negative. And to help manage the risk associated with maintaining coverage in a client’s later years, we’ve introduced cost of insurance options that end at age 70 or age 85. These can help clients keep their policies in force as they get older, rather than dealing with continued costs.
Regular policy reviews with the client are also critical. Needs can change, and it’s essential that policy assets are sufficient and invested to help meet those needs.
- If you had to identify a single feature of UL insurance policies that clients value, what would it be?
If I had to pick one, it would be payment flexibility. So long as you have enough money in the policy to cover the cost of insurance, you have tremendous flexibility to make additional deposits or skip or reduce payments.
But this flexibility can also be one of the biggest client risks too, as skipping payments or reducing deposit amounts can have long-term implications for meeting growth expectations and ensuring the policy stays in force. For advisors, regular reviews of the policy with clients are essential for helping to ensure the policy continues to meet their needs and goals.
- Do you see the transparency of UL insurance in terms of policy fees and costs working to an advisor’s advantage?
I absolutely do. Many clients today want to know exactly how their policy works, so the transparency can be an advantage. Once an advisor has done the heavy lifting involved in customizing a client’s policy, they can show the client exactly what the cost of insurance is and the fees involved – as well as investment return and policy growth scenarios.
- In the future, do you see the pendulum swinging back to more balanced sales figures for UL insurance and participating life insurance?
I do – and there are two potential reasons for this swing back to more balance. The first is that today’s low interest rates are slowly rising. Clients tend to gravitate toward products that give them an opportunity for the best returns. In the late 1990s and early 2000s, attractive guaranteed interest rates and strong equity markets gave UL insurance an edge. As interest rates decreased and markets corrected, clients moved toward the stability of a participating product.1 With interest rates gradually rebounding and stock markets returning to historical highs, we expect the balance once again to start to shift toward a more equal mix between UL insurance and participating life insurance.
The other potential reason is the innovation taking place within today’s UL policies. With the introduction of less volatile, balanced investment portfolios, as well as of shorter insurance cost structures, clients and advisors have an opportunity to manage the potential risks within a UL policy even more carefully, while still benefiting from the payment flexibility I mentioned previously. As these types of innovations continue to become more common, I expect the sales of UL to continue to rebound.
1 Individual Life Insurance Industry Estimates and Forecast – Canada. LIMRA. 2017.