How to function under low interest rates

Advisors must refocus their sales strategies, says Paul Smith, vice-president, marketing & product development at Manulife.

“No one has ever operated in such a low-interest-rate environment,” he told our 2012 Distributors’ Summit, held June 6 to 8, 2012 at the Fallsview Casino in Niagara Falls, Ont.

“This is a different world, and the products that used to work may not anymore.”

He’s concerned others in the industry haven’t realized the gravity of the situation.

“Since December 2010, long-term interest rates have fallen 35%,” he says. “To get back to 4%, they will need to rise 72%.” To deal with that reality, Manulife announced a third round of price increases, effective June 16, 2011. Smith expects his competitors to follow suit.

“For a male aged 30, his prices have gone up almost 60%; for someone over 65, we haven’t touched those prices,” he says.

“If someone paid the actual cost of insurance every year, it would go up every year as the person ages. We call this Yearly Renewable Term. With Level Cost of Insurance, we charge the same every year — we effectively overcharge in the younger years and we undercharge in the later years because we invest the premiums.

“Over age 65, there’s not a lot of interest-rate exposure because we don’t rely on investment returns to generate pricing.” Advisors, then, should change how they pitch insurance.

Products to sell

Traditional risk protection products and products where the policyholder takes the investment risk will do well in a low-interest-rate environment. These products include:

• Term products T20, T30, T65 (life and ci) Disability income
• Policies that end in less than 30-to-40 years
• Guaranteed Level COI products As long as they have shorter durations
• Products where policyholder takes the investment risk: Participating Whole life YRT Ul “Adjustable” Ul

“When interest rates were high, insurance products became hybrid investment and insurance vehicles,” he says. That’s no longer feasible. Lower interest rates mean higher prices, so advisors really need to focus on selling insurance policies based on their risk protection benefits, instead of their investment viability. “If people want a completely guaranteed insurance solution, the investment return isn’t going to be great,” he adds. “But it’s still providing a death benefit tax-free; it’s still providing a payout today if there’s an illness.”

Source: Manulife Financial

What to sell?

Smith says advisors should concentrate on products that fare well in low-interest-rate environments (see “Products to avoid” and “Products to sell”).

Products to avoid

Long-duration products are more challenging in low interest-rate environments. These include:

• Guaranteed Level COI products with longer durations Under age 60
• Term Life, UL, CI Limited-Pay products
• Products with return-of premium riders
• Term 10 Clients don’t always renew with the same insurer

“Less than a year ago, people could get a minimum interest rate guarantee on a UL policy of 3%, with bonus, and that’s a pretty attractive offering,” he says. “Now, long-term interest rates are sub 3% and 10-year interest rates are sub 2%.We’re going to have to change what we offer and how we offer it.”

For instance, Term 10 insurance, traditionally a loss leader, is becoming even less profitable. “Prices have been coming down as mortality has improved on those products. Advisors tend to rewrite policies at year seven or eight. But it’s hard for insurance companies to make money [if that happens].”

Also, clients don’t always go back to the same insurer. “T-10 is the building block of the business, so companies have tolerated the situation” until now. T-20 is now priced to be roughly equivalent to buying two consecutive T-10s, so advisors should look at T-20 when there is a need for coverage longer than 10 years.

Smith also foresees the return of adjustable universal-life products, which were popular in the rising interest-rate years of the mid-1970s, and lasted until the early 1990s.

“[Clients] might start out paying a relatively high premium, but as interest rates go up, policy premiums will go down,” making the purchase more attractive.

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.