Industrial Alliance has jumped onto the bandwagon of companies offering low interest rate fluctuation resistant products. The insurer stands out from the competitors with its new adjustable premium universal life.On June 3, Industrial Alliance launched Trend, level-cost UL with premiums adjusted to interest rates at particular periods. When purchased, the contract stipulates a maximum premium guaranteed for life. It also offers insured a premium discount that varies according to their age.

This discount last 10 years, after which the premium is adjusted based on prevailing interest rates, at the 10th anniversary of the policy and every five years thereafter. No adjustments are made for insured over age 70.

During each adjustment, the insurer determines the new premium that the policyholder will pay according to the value of the Trend index: the average of long-term provincial bond yields over the previous five years. This value is rounded to the nearest 0.5%.

If the index is rising, the premium will be cheaper than the maximum premium foreseen in the contract. If it is falling, it will be more expensive, but will never exceed the maximum premium.
The company did not balk at offering the new product at a lower price than its traditional universal life Genesis (including Genesis-IRIS). For a life insurance amount of $200,000 under Trend, an insured age 30 will pay a premium of about $1069.56. Similar insurance with Genesis would cost $1204.72.

Industrial Alliance gave the example of a maximum premium of $1497.36. Over 10 years, the insured saves $4278. According to the scale the insurer presented, these rates should currently be at 2.5% or less for insured who pay the maximum premium. A rate of 5% would let them continue to pay the same premium at a discount. At a rate of 8%, they could pay the lowest possible premium: $756.96.

Unlike traditional life insurance products, Trend does not distinguish between the sexes or between smokers and non-smokers. “The main characteristic that influences the price of an adjustable product is age, because the longer the term, the greater the impact on interest rate risk,” says Pierre-Laurence Marchand, product development analyst at Industrial Alliance.

The discount on the maximum premium also varies by age, Mr. Marchand says “Insured age 25 will pay about 15% less, and those age 60 about 30% less.”

Mr. Marchand explained the advantage of this discount. “By sharing the interest rate risk with the customer, we lower our required reserves. This means a lower capital cost for the product. We transfer this cost savings to the customer by reducing the premiums. Insurers call this actuarial arbitrage: the company has to hold an amount for interest rate risk, but the customer does not.”

Industrial Alliance’s index is based on Quebec long-term strip bonds (25-30 years). “The strips currently offer a rate of 3.5%, whereas Canada bonds with the same duration yield 2.5%,” he points out.