Premium Advice — Forgotten insurance practices shine in volatile markets

Headlines of bailouts, rescue plans and bank failures no doubt have your clients on edge, but I bet most of those frantic calls you’re getting centre around whether or not someone’s portfolio can withstand the downward market pressure. Insurance planning, though, has historically played a crucial part in financial planning during periods of market disruption.

When markets are turbulent, traditional protection-based insurance planning has usually increased. That’s because advisors who work with a variety of products and do holistic planning don’t often implement recommendations all at once. When insurance and investments have been recommended, investments are often done first, but when investments are difficult to implement, the insurance conversation becomes a focal point of the financial planning discussion as a way of ensuring that progress is still being made on the overall plan. For clients, an increased awareness of security and protection needs seems to be more prevalent during these volatile times, making them more open to insurance discussions. With this in mind, what types of product solutions tend to be used?

The one product that has made a huge resurgence since the market volatility of 2000-2001 has been whole life insurance. Once thought of as a bit of a dinosaur, many of the original tenets built into the design of whole life help clients weather the storms of market uncertainty.

The knock on whole life has always been that guaranteed cash values tend to equal a low rate of return, and that there is no certainty of excess returns and dividends above these guarantees. While that is true, it only tells half the story. Would it be fair to neglect the bond and equity portion of a portfolio and only count the money market or cash component? After all, equities can be volatile, and bonds can experience capital losses. The only components with some guarantees in a portfolio are cash and GICs.

Whole life insurance provides base guarantees of cash growth with upside potential. The upside is provided primarily by dividends that are mostly based on an asset pool managed by the insurer. Regardless of the insurer, these asset pools tend to be fixed-income focused, but are invested in things like equities, real estate, cash, bonds and policy loans. The insurer decides on the asset mix, which can be as low as 65% fixed income, or as high as 99%, with the balance of the pool invested in real estate and equity. The net result is that most whole life funds return 6% to 8% over time net of any fees, and have a standard deviation of between 1% and 2%.

The key reason for this low volatility is an annual dividend review that is the result of detailed actuarial analysis and requires the approval of a company’s senior management. If a client has a need for capital at death, and a need to tax shelter excess cash, it’s hard to mimic this type of stable performance elsewhere.

For these reasons, many advisors rediscovered whole life in the post-millenial market turmoil. No longer chasing 20% paydays, expectations returned to historical norms of 5% to 10% returns. The potential of offering 6% or more on a tax-sheltered basis, with lower volatility than most fixed-income investments, suddenly became appealing again.

For living benefits planning, one interesting trend I’ve seen presented at industry events is that claims on disability insurance increase during times of economic turmoil.

While a pessimist might suspect that some questionable claims are being submitted after a job loss, I think there’s a simpler explanation. Although I’m not a doctor, I don’t think any medical professional would dispute the relationship between our levels of stress and our health. A positive mental outlook has a positive impact on our health. Is it unreasonable to surmise that the stresses of uncertain economic times can have a noticeable impact on health events?

The problem for clients impacted by health events is that it’s often too late for them to qualify for disability, critical illness or other health-related products. However, for their close associates who recognize the financial impact of the events, the importance of securing their financial picture with insurance becomes more apparent. Many advisors who have previously positioned living benefits recommendations find their clients more apt to act on their recommendations when an unfortunate event befalls a close friend or family member. Unfortunately, a sense of “attachment” to the benefits provided by insurance is often needed before a desire to implement the recommendation is followed.

If recent LIMRA stats can be believed, it would seem that we’re in another one of these cycles. In the first half of this year, all insurance lines showed progress. However, there is usually a slight lag between actual economic turmoil and client behaviour. After all, it takes time for behavioural change to set in, businesses to be written, and then underwritten. But if history is any indicator, products that were once old can be new again.

Chris Paterson is vice-president of sales for Manulife Financial.

(10/02/08)