Sign up for the new Globe Advisor weekly newsletter for professional financial advisors on our newsletter sign-up page. Get exclusive investment industry news and insights, the week’s top headlines, and what you and your clients need to know.
Rising prices and interest rates are taking a bite out of many clients’ household budgets, prompting them to take measure of their spending to cut costs. Yet, one line in their spending list that shouldn’t be reduced is insurance.
Nonetheless, this facet of financial plans that addresses key risks from illness to disability and death is likely coming up in discussions with cash-pinched clients.
“I’ve had clients phone me before, saying their cash flow was tight and asking whether they needed their life insurance, wanting to cancel the policy to save money,” says MaryAnn Kokan-Nyhof, certified financial planner (CFP) at IG Wealth Management in Winnipeg. Without fail, her advice is to find another way to reduce spending.
Of course, it’s not premiums for existing policyholders that are increasing.
“Rather, their disposable income has gone down,” says Christopher Dewdney, CFP and chartered life underwriter (CLU) with Dewdney & Co. in Toronto.
Many are facing higher interest costs on mortgages and lines of credit while more money in their budgets is going toward transportation and food – among the outlays seeing the highest increases on Statistics Canada’s Consumer Price Index (CPI).
“Everybody’s dollars have seen encroachment because of rising costs,” he says, adding that affects their ability to continue to afford insurance.
The difficulties are likely felt most acutely among young clients, who may now just be considering term or whole life, disability and critical illness coverage. The premiums for these types of insurance are always generally rising, just not because of inflation.
Instead, premium inflation is a result of clients aging the longer they delay purchasing coverage, says Lorne Marr, director of business development for Hub Financial Inc. in Markham, Ont., which provides access to insurance and related risk management services.
It’s in these conversations in which advisors can prove their value by helping clients understand those premiums deserve space in their budgets, he adds.
“Insurance is the foundation of a financial plan,” says Mr. Marr, also a CFP. “Everything depends – including the ability to invest – on income, and if that income goes away due to illness or death, then clients … can’t invest or even pay bills.”
However, one silver lining is premiums are generally not rising, or at least as much as other goods and services in this period of higher inflation, Mr. Marr says.
“If you look at $1-million of term life insurance for a 40-year-old, it’s less expensive today than it was 30 years ago, and that’s because people are healthier and living longer,” he says.
Still, costs are rising for insurers – such as labour costs.
But higher interest rates to tame inflation are usually a tailwind for insurers’ profitability because their core assets to meet near-term liabilities yield more.
“If you look at even a year ago, bonds were yielding much less than today,” Mr. Marr says about fixed income assets, which are the foundation of insurers’ assets to meet liabilities.
U.S. five-year bond yields, for example, are now hovering around 3 per cent compared with the same period last year when they yielded less than 1 per cent.
Consequently, insurers require less exposure to equity markets to meet future liabilities, he adds.
Impact of the pandemic on premiums
That said, premiums have increased for some new applicants, only not as a result of the current inflationary environment.
As well, some life coverage – like universal – can see premiums rise over time regardless of inflation, Mr. Marr says.
One recent event that has had an impact on premiums for new policies is COVID-19, says Matt Hands, director of insurance at Ratehub.ca in London, Ont.
“It has increased the amount some people will pay for life insurance,” he says.
To that end, a 2021 study published in the Journal of Risk and Insurance found premiums increased for individuals deemed at higher risk for severe illness and death from COVID-19.
Other forms of insurance have also risen in cost.
Mr. Hands points to the CPI, which found home insurance increased by 4.9 per cent year over year in June.
A PricewaterhouseCoopers (PwC) study found property and casualty (P&C) insurers, which include home insurance, are likely facing premium pressures given the rising costs for replacing homes and automobiles.
However, auto insurance costs actually declined in Canada in June, new CPI data show. That’s likely a factor of fewer claims with fewer people still driving to work – an outcome of the pandemic, Mr. Hands infers.
It should also be noted that the CPI doesn’t include life insurance premiums, although financial services – under which life and living benefits insurance could fall – were up about 4 per cent year-over-year.
In addition, the PwC study pointed to higher interest rates only benefiting life insurance providers so long as rates do not rise too sharply too quickly.
Importance of inflation-hedged rider on plans
Still, inflation, inevitably, affects household budgets negatively, which, in turn, may hurt clients’ ability to afford life and disability coverage, Mr. Hands adds.
Although premiums are not affected, even existing policies may require a rethink.
“With inflation where it’s at, there could be real pressure on a fixed disability benefit amount,” Mr. Dewdney says. “This really speaks to the importance of an inflation-hedged rider on that plan.”
Yet, benefits for life coverage, particularly term, are likely less of a concern, Ms. Kokan-Nyhof says.
“It shouldn’t affect the calculation in the needs analysis we do with clients because assumptions for inflation, long term, should not change,” she says.
“This inflation right now is likely temporary, so you don’t want to use the current period of very high inflation in the long-term needs analysis as the basis to increase clients’ coverage.”
What’s likely more pressing for clients is managing household budgets today to afford insurance premiums, Mr. Dewdney says.
“So, the affordability issue for clients is not so much about premium costs rising; it’s about cash flow challenges to afford premiums because more of their money is going elsewhere.”
For more from Globe Advisor, visit our homepage.