Universal life policies without bonuses are gaining groundpar Alain Thériault | September 18 2006 08:04PM
High management expense ratios are causing increasing concern for clients and advisors alike. But with its low fees, no-bonus universal life insurance is building on the situation to gain favour in the industry.
After experiencing a number of difficult years marked by negative stock market performance, investors are no longer prepared to pay a high management expense ratio (MER) on their investment vehicles. Universal life (UL) insurers are drawing on this predicament to spur a revival in low-fee UL policies among product developers at insurers and their distribution networks.
An internal study conducted by PPI Financial Group has revealed that the average MER for UL indexed accounts with bonus is 3%. The study was based on observations of products offered by a number of insurers. “In general, the highest MER for a policy with bonus is 3.75%, with the lowest standing at 2.00%,” states Andrée Couture, director of marketing services in PPI’s Montreal office.
In addition to the base MER, another fee is often added for the underlying fund. Such is the case with index options that reflect, for example, the performance of mutual funds from external suppliers, such as CI, AIM/Trimark and Mackenzie Financial mutual funds.
With respect to fixed interest investment options, most companies charge essentially the same rate, i.e. 90% of the Canada bond yield for the same maturity date minus a fee of 1.75%.
No-bonus UL policies allow indexed option fees to be cut in half. Ms. Couture adds that typically these policies post an average MER for indexed accounts of between 1.25% and 2.55%. For fixed income investment options, the fee formula remains the same for no-bonus versions.
With such varied fees, many brokers are having second thoughts about the relevance of a bonus version, particularly in the case of indexed investment options. “People don’t want to pay high fees on an account in which they simply buy securities that correspond to an index and require no active management,” explains Serge Assayag, president of Botica Group, a managing general agent (MGA) in Montreal.
An average MER of 3% on policies with bonuses is clearly too high, according to Ashley Crozier, actuary and independent advisor. He believes that a rate of between 1.5% and 2.5% is much closer to what advisors and their clients are seeking.
Mr. Crozier welcomes the arrival of no-bonus UL policies to the market. “Insurers simplified the product, they lowered the MER, and they took out the bonuses, which in turn lowered the MER,” he explains. “The plans are simpler to understand because they don’t have the bonuses.” He adds that no-bonus policies also help bust the myth that it costs more in management fees to invest with an insurer than with a mutual fund company.
Not surprisingly, the market is adjusting to the new trend. Saundra Edwards, assistant vice-president, individual life insurance marketing and product development at Great-West, Canada Life and London Life, believes that in the future, companies that offer products both with and without bonuses will have a distinct competitive edge. The three companies she represents offer the two options.
At AIG Life Canada, another insurer offering both solutions, the marketing team is placing increasing focus on the company’s low-fee product. Indeed, it is this product that is currently favoured by most advisors. And while most continue to sell the product with bonus, “the low-fees plan option is really gaining momentum,” states Steve Carter, vice-president, marketing, at AIG. For now, the no-bonus option represents one-third of new UL policy sales.
According to Mr. Carter, the advantage for advisors, besides satisfying clients who are more and more sensitive to management fees, is not having to explain how bonuses work. The bonus structure of a universal life policy is highly complex.
Clients are migrating towards the no-bonus version. “Clients with a higher net worth are increasingly making a transition to low-fee policies,” observes Mr. Carter.
The Life Dimensions UL policy offers a wide range of options on more than 400 underlying mutual funds and 46 investment options at 0% fee. Its low-fee version features an MER ranging from 0% to 1.50%, to which is then added the MER of the underlying fund. In this version, for example, the Mackenzie Universe Precious Metals fund is accessible at no fee through AIG, with an underlying MER of 2.49%. In another example, the Mackenzie Maxxum Canadian Equity fund carries a charge of 1.25% through AIG, plus an underlying MER of 2.42% for a total cost of 3.67%.
Among the lower-cost solutions offered by Transamerica Canada, reports Joe Kordovi, vice-president and pricing actuary, life products, only the MER of a given fund is charged to clients of its no-bonus product. The company does not add its own management fee to this charge.
In addition, the insurer’s indexed accounts carry a 3% management fee for UL with bonus and a 1.75% fee for those policies without bonuses for all indices, including international funds.
In keeping with the trend, on August 14, Industrial Alliance launched Genesis, a minimum-fee version of its universal life product, reports marketing advisor Martin Vézina. With this low-fee product, the insurer pays no annual bonus and charges only the external manager fees associated with the actively managed funds.
In this policy’s new version, actively managed funds without bonus are 1.75% less expensive than those with bonus. For example, Industrial Alliance’s Canadian Equity funds carry a MER of 2.35% in the no-bonus policy and 4.10% when a bonus is included. The previous reduction was just 1.25%.
Mr. Kordovi has also observed the trend towards no-bonus products. He believes, however, that it is important to focus on education to assure a smooth transition to reduced management fees.
Mr. Kordovi says it is difficult to compare universal life products solely on the basis of management fees. “Each company sets its own MERs,” he explains. He adds that if he were an advisor, he would conduct an annual analysis of all UL products, or he would have such a study conducted by an MGA. Following the study, he would focus his sales efforts on a handful of products that reflect his target market.
Although Standard Life Canada does not expect to offer a no-bonus version of its UL product anytime soon, Gerry Anthony, the company’s senior consultant, education and training, says that given the fierce competitive landscape, the firm is keeping indexed account management fees as low as possible.
He maintains, however, that management fees are not at the crux of the debate. Like Mr. Kordovi, Mr. Anthony believes it essential that universal life products be compared with one another. Even if one product’s MER seems high, the product might compare favourably with another by offering a greater selection of investment options.
Back to the source
Pascal Di Lillo, senior sales director at Investors Group, states that this trend represents a return to the way things were initially done, when the product carried no bonus. He personally favours the no-bonus product when making recommendations to his advisors or clients.
Mr. Di Lillo believes that when all is said and done, a policy with bonus is more expensive, even if the client receives the bonus, because the insurer often collects fees higher than the bonus paid to the client. The bonus mainly serves to boost the illustrated accumulated value of the fund, he explains. The presence of a bonus can have an impact on the fund value expected over the long term, which makes the product with bonus appear more attractive than the no-bonus option.
However, he stops short of dismissing any management fee judged too high. “It depends on the overall performance of the policy,” he maintains. “If I make 10% on an index option, 3% no longer seems expensive. If I make 2% or 3% with a fixed interest option, even 1.5% seems expensive.”
According to Mr. Di Lillo, the best assurance against the effect MERs can have on the accumulation of funds in a UL policy is to distribute deposits across a variety of investment options to balance performance. “Often, advisors forget that the portion invested in a universal life policy must be treated as any other investment vehicle within a perspective of asset allocation,” he concludes.
Mr. Kordovi has not abandoned the UL policy with bonus. Like his colleague at Investors Group, he believes that advisors must understand their clients’ needs before recommending a universal life policy either with or without bonus.
For Mr. Assayag, it is the client’s long-term objective that’s most important when choosing a product. “I do not sell a universal life policy with bonus when the client is buying it as an investment tool,” he affirms. “When the purchase is mainly for insurance purposes, that’s when I sell the policy with bonus.”
Independent advisor Robert Beauchamp believes that very few of his colleagues have in-depth knowledge of the UL product. As a result, transparency is lacking when the product is presented to the client. “No one talks about fees. Among the people selling universal life, very few truly understand the management and complexity of the product.”
And, says Mr. Beauchamp, those who do not adequately explain the product prior to the sale, risk prosecution. He also believes that UL is a product that must be closely monitored by the advisor following the sale. “This policy must be managed for the client on a regular basis, both in terms of the performance of the investment options and their allocation,” he explains. “Sometimes, companies will eliminate investment options and replace them with new products.” He concludes that these are all details that advisors must follow closely to protect their clients from unpleasant surprises.