Market volatility causes brokers to shift to whole life

By Daniela Cambone | September 20 2003 03:41PM

The debate regarding universal life versus whole life has heated up during the past months. Though most brokers still prefer universal life, insurance companies are experiencing dipping sales with the product, and are witnessing better growth with participating whole life.

And with Standard Life Canada’s withdrawal from the participating (par) whole life market as well as Sun Life Financial’s upcoming absence from the par market this fall, the gaps are allowing other insurers to further capitalize on the products.

Great-West Financial is one example. The insurer is experiencing tremendous success with the par product. In its 2002 annual report, the company explains that it is focusing on its whole life business. It reads:
“Sales of participating policies increased 28% in 2002, and continued strong in the age 50+ wealth management market. The retrenchment of participating insurance sales in Canada by competitors, spurred by demutualization, continues to bolster the Company’s dominant market position of more than 40% of Canadian participating insurance sales.”

“Well I would say that, yes, par sales have increased fairly significantly each year for the last two to three years,” says Saundra Edwards, Director of Individual Life Insurance with Great-West/London Life. She adds that the company’s sales are up 50% year-to-date over last year’s premiums.

As for the company’s universal life (UL) product DiscoverLife, Ms. Edwards says that the company currently does not have a competitive UL product. “We were the first company to come out with the product in the early 80s. But in the 90s – with the move to the level cost of insurance and those rates being driven down because of competition – we felt it was not a product we were comfortable with and felt that we wanted to stay out of that market for a number of years.” Currently, the product makes up only one to two per cent of its life insurance premium sales.

Ms. Edwards explains that Great-West has been tracking the product every year, and it felt it could not make an acceptable profit. However, she says the insurer recently had a look at the product and found that now is better timing. “Over the last few years there has been a gradual increase in the level cost of insurance rates so we are more comfortable now that we can make an acceptable profit on that product.”

She stresses that the company is committed to both products but that there has been a trend of UL sales declining in the last few years, while par sales have increased. “I would say what is driving that is the volatility in the equity market…Since 2001, people have taken a step back and said, ‘this insurance product is my family’s or business’ financial security and do I really want it in a product that has equity investments in it?’” she explains.

She also sees that clients are not depositing as much money in UL as they once were. She adds that if they are, they are making deposits in GICs and fixed income investments and not in equity investments.

Marie-Elaine Gaudreault, Coordinator Marketing Individual Insurance for Industrial Alliance, agrees that clients are not investing as much as they were in UL and are avoiding the equity market.

The insurer is the current market leader in UL sales, and the product makes up the majority of its sales. Nevertheless, it too saw a decrease of 20% in its latest results for the product. Rather, its whole life business is growing substantially. During the first six months of 2003, Industrial Alliance experienced a sales growth of 65% in whole life compared to the same period in 2002.

Still, Ms. Gaudreault reveals that the company has not been focusing on its whole life but rather the increase is a reflection of the current markets. “The growth was due to brokers and clients asking for better guarantees, therefore, traditional products,” she says.

As for the companies declining UL sales, Ms. Gaudreault says that the negative results are the same for most insurers. She says that UL sales in the Canadian marketplace witnessed a drop of 12%. However, she is confident that sales of the product will pickup again. “For the moment, we are looking to see how we can improve the product and our positioning in the UL market, but it is dependent on the stock market. We should not expect to see huge growth like we saw in the past, but I don’t think the drops will continue for much longer,” Ms. Gaudreault remarks.

As for what brokers prefer, UL or participating whole life, the opinions are mixed. Any avid follower of the broker discussion list, For Advisor’s Only, located at, has seen the various comparisons posted on the UL versus par whole life topic.

Most brokers interviewed by The Insurance Journal tended to be more in favour of UL, such as Bruce Cappon, a broker and founder of the firm First Rate Insurance.

“A UL policy can be adapted much more readily to most people’s needs, with more accountability, flexibility and adaptability than whole life,” says Mr. Cappon.

But he still feels that more disclosure is needed on certain UL products so there is no confusion on the part of clients. Mr. Cappon says he had talks with the Financial Securities Commission of Ontario (FSCO) to see if they could impose laws that would require more disclosure with UL products.

Short-term thinking

Mr. Cappon points out that there is also the misperception that clients will never see a loss with a whole life product, a reason many brokers are opting to sell it.

“Agents are buying into the product, hook-line-and-sinker. An agent does not look bad anymore because everything is so hidden in terms of returns.” However, he cautions brokers that whole life is only a safer product to sell in the short-term.

Ron Rau an advisor and owner of RJ Rau & Associates agrees with Mr. Cappon that it is short-term thinking on the part of brokers to sell whole life solely because of its “safer nature.”

Mr. Rau remarks that whole life might look great now with the markets, but it is a false economy. “A company’s dividend scale is based on their holdings of investments – typically bonds – that are five or more years to maturity,” he explains. “So really, the returns they are generating are based on investments made five years ago, so it is out of sync with the current economy…. When our current economy takes off again, … I would much rather have something that reflects our current environment.”

Mr. Rau, a supporter of UL, says he only sells whole life to his older clientele. “My concern with whole life is that it is sold on the historical performance of dividends. While it is great to see the dividend scale for the past years, my concern is what is going to happen in the next 40 years because that is what is going to impact me, so there is some accountability there.”

Risky Business?

Mr. Rau stresses that UL is not as risky as it is labelled. He explains that with whole life, the mortality costs are not defined or guaranteed in any way and credit interest and expenses are not guaranteed either. “Yes with UL there is some risk passed on to the consumer and, so far, whatever rate of return you earn will fluctuate. But that is the only risk.”

A word of caution Mr. Rau has for advisors selling UL is to ensure they design a proper UL plan without fatal flaws. “Unfortunately a lot of advisors will put 100% of the clients premiums into an indexed account and that is a fatal flaw,” he stresses.

Others like Top of the Table broker, Thomas McQuillan, never proposed a UL policy in his 47-year career. Mr. McQuillan, President of Toronto-based firm The McQuillan Group, says that UL does not have the guarantees of whole-life products and it shifts risk from insurance carriers to policyholders. While UL is sold on its investment flexibility and tax sheltering, “it’s an expensive way to buy equities,” he says.

He explains that one of the reasons whole life is negatively viewed is thanks to the marketing material insurers hand out. Mr. McQuillan adds it is in the insurer’s best interest to entice brokers to sell UL, since they can make more profit with UL than whole life. “There is not enough money in whole life for the shareholder and what does that tell you? It is a good deal for the policyholder.”

Universal life is an expensive product for insurance firms to maintain since it has to be administered for each policyholder. “Those expenses are either directly or indirectly passed on to policyholders, ensuring profitability for the insurance company,” remarks Mr. McQuillan.

Furthermore, the value of deferred capital gains in UL policies is not tangible, he states. Once policyholders wish to tap it, the accrued capital gains are taxed at the top marginal rate: 46% for many, rather than the 23% tax rate capital gains attract in traditional non-registered investment portfolios.

Other brokers have simply made the switch. Tamara Adamson, President of the full-service firm, Link Insurance and Financial Services previously sold tons of UL. “Going back five or six years ago, 90% of all my permanent insurance was sold as UL. The only time I was selling a guaranteed product was if a client specifically stated, ‘I want everything guaranteed.” She adds the reason behind her amount of UL sales was due to the excellent interest rates of the time. “They [clients] were receiving anywhere between 10% and 15% return on their money and it was returned on a tax deferred basis.”

However, everything changed once the stock market died. “There was not a fund around doing well and all of a sudden those clients were over-funding their UL and they were very unhappy because they were not seeing the results they hoped for.”

Today, Ms. Adamson leans more towards the guaranteed products. She says that she is selling 70% whole life compared to 30% UL. One of the reasons she says many brokers are still favouring UL is due to its tempting first year commission of 60% compared to whole life’s 30%. However, she highlights that brokers should keep in mind that the premium on whole life is higher.

She adds that brokers selling UL should be very knowledgeable on the product because of its variability factor. “You have to make sure you are not misleading the client to believe certain things that are not true…agents are not showing the clients the management fees and the downfalls of purchasing the product,” she says.

Rather, Byren Innes, Senior Vice-President and Director of NewLink Group Inc., does not have a preference for either product. He says that the real issue is matching the right product to the right need given the risk tolerance of the client.

He explains that today’s consumers are much more sophisticated than before, therefore, they understand UL risks and are more tolerant of the markets.

As for the shift back to guaranteed products, Mr. Innes explains it is an overreaction to the marketplace. “People are gun-shy right now, they are saying, ‘Clients have lost all this money with UL. … They are switching from category A to B just because the market is bad but I could argue that the best time to buy UL is now when the markets are lousy,” he states.

Overall, Mr. Innes explains whole life’s increase in sales should not be interpreted as “this is the better product.” Instead, he says it is a reflection of the current fear people have with UL.

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