More than ever, Canadians want and expect choice. While technology is the main driver, the expectation for options crosses every facet of our lives — what we buy, what we eat, what we watch and where we go.
Here’s the question for advisors: is something as “low-tech” as life insurance caught by the same trend? The answer – in a word – is “absolutely.”
Clients expect choice
You see it first-hand in your practice — clients have unique needs, preferences and situations. And when they’re considering a permanent insurance solution, they expect a range of options. However, advisors tend to sell either participating (Par) life insurance or universal life, but not necessarily both. And specific client situations will favour one product over the other.
With that in mind, two options truly are better than one when it comes to permanent life insurance – and it’s important to understand the advantages of each product so you can recommend the right one to clients.
Don’t let “trend bias” stand in the way of good advice
Historically, sales of Par whole life and universal life products fluctuate over time. The instability of markets – coupled with re-pricings – have contributed recently to slower sales for universal life products and increased interest in participating policies. That trend is clear. But it’s important to remember as markets and product pricing fluctuate, so too do client preferences about where to put their money. The reality is that both products have an important role to play. While it varies by year, LIMRA’s annual sales by premium report shows that both products continue to account for the majority of premium in the Canadian life insurance market.
There are a number of factors that can contribute to the suitability of each product to a given client situation. Take into consideration the client’s age, health, income (including income stability), ability to save, investment knowledge and long-term goals when providing solutions to clients.
Here’s an overview of some key elements that both products offer, and some features that are unique to each.
Both products provide:
- Permanent life insurance coverage
- Tax-preferred cash value growth, a great benefit for those who have maximized their registered plan and TFSA savings
- The ability to “overfund” to gain additional tax-preferred growth opportunities
- Retirement fund borrowing options, so the policy can be used to provide a tax-effective source of retirement income
- An opportunity for business owners to incorporate life insurance into their business succession plans
But there are a few important differences too. Use this infographic to help explain the main differences to clients.
- Participating life: These policies offer only one investment option. A portion of each premium is invested in the insurance company’s participating account portfolio of diversified assets (bonds, mortgages, equities and real estate). Clients may receive policy-owner dividends each year from these invested amounts.
- Universal life: These policies offer more choice of investment options than participating life policies. For example, with SunUniversalLife II, clients can choose a daily or a guaranteed interest account, or select from several indexed and managed options. Those who prefer a managed option may choose the Sun Life Diversified Account, which earns interest based on the average smoothed yield of a variety of investments across real estate, private fixed income, bonds, mortgages and equities.
Short-term volatility is lessened due to a “smoothing” process that considers the current and future investment experience of the portfolio when paying dividends. In addition, dividends cannot be negative, so policy values are always maintained. With a single, diversified investment option, participating life policies allow clients to be hands-off when it comes to investment management.
Clients work with you to select and manage their portfolio based on their individual risk tolerance. They can change their investment account options as their needs change.
With both solutions, clients need to understand that values within their plan could fluctuate. It’s important to show clients the impact of a reduced dividend scale on a Par policy. For a universal life plan, in addition to showing clients the interest rate they believe they’ll get, show them one that’s more realistic for the times.
- Participating life: Clients have a choice of paying level participating life premiums for the rest of their lives — or paying off the policy over a specific time with guaranteed limited pay options. Premiums must be made either monthly or annually. Clients can choose to pay an additional “plus premium” amount to enhance the growth of the policy, in addition to their monthly or annual base premium. They can also start and stop plus premium payments at most policy anniversaries.
- Universal life: These policies provide more payment flexibility. In addition to a wide choice of cost of insurance options, including paying off the policy over a specific time period, clients can make payments at any time. Clients can choose to pay the pure cost of insurance or they can choose to overfund their investments, providing tax-preferred growth. They can also start and stop payments when they choose.
- Participating life: With Par policies, it can be difficult to separate the pure insurance component from the investment component. This can create many questions for clients, particularly those who want to know all the details of their policies.
- Universal life: Both the client and advisor can see all of the costs — such as insurance, management fees, premium tax, and investment returns and calculations. Clients have more transparency about their policy and where their payments are going.
Meet the need – expand your options
One size doesn’t fit all when it comes to permanent insurance, and the best product choice will depend on a client’s needs and preferences. In fact, some clients who place a priority on diversification may choose to hold both types of policies to help manage risk and access the unique benefits of each.
The permanent life insurance market is strong and opportunities abound. If your practice focuses on one form of permanent insurance, consider the benefits of expanding your options. Evaluate both participating life and universal life products and put the needs of clients first.
Contact your Sun Life relationship manager
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