Universal life shows stronger vital signs

par Alain Thériault | September 26 2009 07:30PM

Universal life insurance premiums may have continued their freefall in Q2 2009, but many insurers think the worst is over. They are encouraged by a rise in universal life insurance applications. And, sales are rebounding for some products in this sector.

At first glance, the situation looks bleak. Excess premiums in universal life (UL) policies continued to shrink in Q2 2009 compared with the same quarter in 2008. The most recent LIMRA data show a 40% plunge, according to the insurers interviewed (see table on page 8).

Universal Life with Yearly Renewable Term COI or cost of insurance, the ideal product for excess premiums, was hardest hit. Sales declined sharply during the same comparison period.

Sales of Level COI were almost as dismal. This product is often used for pure protection rather than investment, insurers point out.

Only limited pay UL saw premium growth, but not enough to make up for the declines experienced by the other products. Overall, new UL premium sales in Canada were down 15% between Q2 2008 and the same quarter in 2009.

"According to LIMRA figures, $260 million of total new UL premiums have been sold in the first half of 2009. It's the lowest amount for quite a while," says Paul Smith, Vice President, Marketing and Product Development, Individual Life at Manulife Financial.

Industry results have not been this low since Q2 2004 when they were at $270 million, he adds. Universal life insurance premium sales in the first six months of 2008 were $330 million. This was before the recession.

Clients are putting off their purchase decisions, Mr. Smith says, especially in estate planning, a market heavily weighted in excess premium policies. This is a market where Manulife has a strong presence. "People don't want to bet on the markets anymore and they don't want to worry about the market," Mr. Smith continues.

Peter Wouters, Director, Tax and Estate Planning and Director of Retail Risk Product Marketing at Empire Life is also not surprised at the LIMRA results. He says that the recession is teaching the market an important lesson: universal life is not the only solution for all insurance needs.  

The stock market drop and the new Tax Free Savings Accounts (TFSA) have impacted UL sales, he says. Mr. Wouters expects the TFSA will have an ongoing impact in the future. "People see the TFSA as a financial vehicle for modest accounts that is even more efficient than the tax free growth insurance policies." It is also flexible. "You can take money out and put it back tax free," Mr. Wouters explains.

He thinks clients with more modest means will opt for pure protection products such as term insurance and level cost, minimum funded universal life.

Applications up

Despite the downturn, industry players say they are seeing the light at the end of the tunnel, especially due to a generalized increase in UL life insurance applications.

Mr. Wouters has seen an increase in life insurance applications across the board at Empire Life since the start of the year. Interviewed in August, he mentioned that while UL applications are up, he is not seeing as many large cases coming in. "We see smaller face amounts without a big commitment to extra funding. It's just starting now, but not with the same volumes as in 2007. People are starting to regain confidence but they are more cautious."

Applications are also increasing at Sun Life Financial for all products combined. Year to date, insurance applications are up almost 35% over the last year, said David Gray, Vice President, Wholesale Distribution. Interviewed in August, he says sales are not increasing yet, but this may change when the applications are accepted. He also notes signs of recovery in universal life in the national accounts network (securities sector) known for its large insurance cases. Even so, "We don't have the jumbo sales of a couple of million dollars that we saw in the past," he points out.

Canada Life and Great-West Life are also reporting a turnaround, even for excess premiums. "Starting in June, we've seen an increased number of applications in UL and we see more excess deposits coming in," says Saundra Edwards, Assistant Vice-President, Individual Life Insurance Marketing at Great-West. This trend emerged six weeks ago, she told The Insurance Journal in an interview in mid-August. There are no signs of it tapering off, she adds.

Nevertheless, UL life insurance sales at Great-West showed zero growth over the same quarter last year. But that is an improvement over the decline posted in Q1 versus the same period last year, Ms. Edwards points out.

At Transamerica Life Canada, Joe Kordovi, Vice-president and Pricing Actuary, life products, reports a 3% increase in UL applications submitted in the second quarter this year compared with Q2 of last year. All the same, he observes that sales of this product slumped during the same period.

However, he sees a current growth trend in term insurance sales as an encouraging sign since many of these policies may eventually be converted into universal life policies. Term applications were up 14% in the second quarter 2009 compared with the same quarter last year, he says. Mr. Kordovi also pointed to Transamerica's large, long-standing block of in-force term business. This block will soon have an impact on the company's UL sales, he predicts.

Limited pay

Several lifecos highlighted the strong sales performance of basic protection products, especially those with limited duration of premium payment, or limited pay.

Manulife, for example, saw strong sales of its limited pay UL product Security. Citing LIMRA data, Mr. Smith says that the limited pay product is making unprecedented inroads in the market. In the first quarter 2009, LIMRA reports that 21% of UL sales - by cost of insurance premiums only - were in Limited Pay products, he explained. "That product accounted for 27% of the total number of UL policies during the same period. Five years ago, there was almost nothing in that category," Mr. Smith points out.

He underlines the popularity of investment options at guaranteed rates, as advisors steer their clients' money away from risk. "They don't want to get their clients back in something that would go down, so you'll see more money go into guaranteed investment accounts," Mr. Smith says.

Empire Life does not want to miss this boat. This summer it increased its 20-year guaranteed investment option rate in its Trilogy and Trilogy Plus products from 2.625% to 2.875%. The insurer also extended this adjustment retroactively to its block of business over two years, Mr. Wouters says.

Other players are also making major changes. RBC Insurance recently announced that it intends to launch a "competitive" UL product in late October, which will replace the Destiny product. These are the only details the insurer's spokesperson Margie McNeil would share for now. Concurrently, the insurer will launch a new Term 100 product.

Standard Life Canada is bucking the trend. It achieved solid results with its YRT policy, according to Gerry Anthony, Senior Consultant, product development, individual markets. This insurer is in a unique position: it migrated from the level COI universal life insurance market to YRT for profitability reasons.

"Total UL premium sales are slightly up. Our average size premium by UL case is up 20% at the end of July compared to the same date last year. We're starting to see excess premiums coming in. There's a feeling in the market: clients think the over," Mr. Anthony says.

At Standard Life, investment is its bread and butter, Christian Martineau Senior Vice-President Finance, explained, when asked about the insurer's results for the second quarter. "Our individual growth strategy is to sell investment products and present insurance as a tax tool to protect investment portfolios," he continues. Individual life insurance makes up about 15% of total individual premiums and deposits at Standard Life in Canada, he says.

MGAs confirm trend

Despite the setbacks in investment-oriented universal life, the independent distribution network confirms signs of an upturn. Financial Horizons Group, a Canada-wide managing general agency (MGA), takes universal life very seriously. President John Hamilton conducted an internal study of UL from the start of the year to July 31. He found that UL sales stagnated in 2009, but picked up in the last three months.

The number of policies edged up since the start of the year, by about 1%. In contrast, premiums advanced by 5% during this period. Little in the way of excess premiums were collected in 2009, but this situation began to turn around in the last three months, Mr. Hamilton points out. Even the YRT product is performing better than in early 2009. "Our expectation is that UL sales will be strong for the rest of the year. People are getting more confident about overfunding," he adds.

Financial Horizons Group sold $4.8 million in universal life insurance premiums by July 31, 2009. "We predict we'll reach the $10 million level at the end of the year if it continues like this." The group racked up a total volume of life insurance premiums of $18 million in 2008, including UL.

James McMahon, President of Force financière Excel, says this year's results up to August 14, were 14% stronger than those during the same period last year. He pins the growth on three star products: whole life, term insurance and minimum funded universal life. "People aren't taking risks any more. They want a policy with guaranteed premiums that invests in 1 to 5 year guaranteed investment certificates," he says. He believes that UL growth will be fueled by level premium insurance policies rather than policies with investments. "Brokers think that universal life is above all an insurance product," he explains.

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