Term insurance: innovation rising, prices falling

By Alain Thériault | March 07 2012 09:21PM

Ten-year term insurance is cheaper than ever—it’s almost becoming a commodity product. Our information service InsuranceINTEL highlights a constellation of new features, in a market where usually only prices move.
Ten-year term insurance (T10) costs less today than it did 14 years ago. An article published in The Insurance and Investment Journal in December 1998 reported that the best annual rate available to a male non-smoker age 40 was $510 (preferred) for a T10 insurance amount of $500,000 from Transamerica Life Canada.

Under the same conditions, this insured could get T10 today for $340. A parallel discount is offered by RBC Assurance and UL Mutual. Transamerica provides the same protection for $365. BMO Life Insurance sold the product for $565 in 1998 under the AIG Life of Canada banner. Today the insurer has marked the product down to $350. In the past 14 years, Manulife Financial squeezed its best price from $590 to $391.92.

The price compressor: improved life expectancy. The policy lapse assumption also plays a role. The more insured that let their term policies lapse, the easier it is for the insurer to cut entry prices because it will not have to bear as much long-term risk. As a result, insurers can be sure there will be enough lapses to support their pricing.

Higher renewal premiums

“Today, the average renewal premium is almost seven times higher than the initial premium. Ten years ago it was only three times as high. The only ones that do not cancel their policy at renewal are people who are no longer insurable or who already converted it,” Andrée Couture, marketing services director at PPI Advisory, explains.

With the cheapest preferred T10 entry price on the market, RBC and UL Mutual have respective renewal premiums of $1,836 and $1,938. Most of the other players are in the same renewal range.

As they wait for renewals, advisors end up working for minimal pay. “In fact, they pay to sell T10,” Ms. Couture notes ironically. A first-year commission of 40% on a premium of $300 barely covers the advisor’s costs and administration fees. The real purpose of T10 is to help someone get their foot in the door and cement the relation with the client, she says.

These days, advisors are following term insurance rates closely, says Christian Laroche, vice-president of Pro Vie Assurances. “It’s the flavor of the month. But people are realizing that there is not much difference between insurers. Sometimes they are only a few cents apart,” he points out.

Excellent service

With such a slim spread, advisors can choose whatever insurer they want, Mr. Laroche says. “With price not a factor, advisors will choose the one that offers excellent service,” he continues.

Insurers can stand out by delivering the policy at the specified rate without excess premiums or rejections, within a reasonable timeframe.

“A supplier with a policy that appeals to insured age 40 and under may be weaker with an older clientele. Some suppliers are more flexible than others in certain niches. We try to find the niche,” Mr. Laroche adds.

Features are another emerging differentiating factor. In February, BMO Insurance beefed-up its T10 and T20 lines. These products are now available as a rider on universal life insurance and nonparticipating whole life contracts. The insurer points out that in May, it reduced its issue rate for insurance amounts of $250,000 or more.

Popular in recent years, the critical illness rider for children recently migrated to all La Capitale term policies. For its part, UL Mutual now offers cash surrender value starting at age 75 on its T100.
Desjardins Financial Security (DFS) raised the maximum age for conversion. The insurer also added more flexible conversion options.

In late 2011, DFS launched its first T30. To entice advisors, the insurer boosted the first-year commission by 5% for all sales of T30, until June 30. This brings the total first-year commission to 50% until that date.

DFS is targeting loan coverage and income replacement needs, says André Langlois vice-president, development and marketing, individual insurance, in line with other players in the credit sector.

“Individuals and companies alike are taking advantage of low interest rates to refinance their loans. By extending the amortization period, they free up liquid assets. Debts are managed more easily with T30 than with T10 or T20,” Mr. Langlois explains. He underlines the strong trend toward lengthening mortgage loans.

T30 policies can also meet a need for income replacement for a family clientele. “Young families don’t always have the cash to renew coverage in 10 years or convert the policy during that period,” Mr. Langlois explains.

After its 30-year term, the policy is renewed every 10 years thereafter. DFS issues this policy from ages 18 to 50, for insured capital ranging from $50,000 to $10 million. Coverage ends at age 80. Insured can convert the policy up to age 70. Preferred rates are available starting from insurance amounts of $250,000. Protection is not offered as a rider on the PACE platform.

Allan Bulloch, president of Independent Planning Group (IPG), does not yet see a strong trend for T30. “There are still so few companies offering this product…We only offer T30 through Transamerica, but I have not seen a significant number of T30 policies sold by our advisors so far,” he says.

Mr. Laroche does not see a marked trend in this T30 either. When advisors want to cover a debt or accompany a client until retirement, they have an array of products to choose from: T10, T20, T65, T100, etc. Mr. Laroche says, however, that T30 is well-suited to a young business clientele or a family with a mortgage.