HFI Financial

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Analysis and comment on news and trends in the life insurance industry.



"Life" Insurance becoming just that, as new
  products arrive on a changing scene

In the changing world of risk management, traditional forms of Life Insurance are fast becoming as quaint a notion as pay phones.

Demographic bulges shaped by longer life spans - along with the brisk pace of globalization and a relentlessly sophisticated, demanding marketplace - are driving the insurance industry to develop more intricate and responsive forms of coverage known as "Living Benefits. " And while the market for traditional insurance products seems to have flattened out, sales of living benefits such as income replacement and critical illness insurance are booming.

Fold into this mix insurance contracts which feature mutual funds, segregated funds, capital benefits, optional life benefits and a potpourri of investment options, and the range of choice itself can sometimes intimidate.

In this brave new world of tailor-made insurance coverage, consumers with special needs may be thankful for the selection available. But they must also step cautiously in seeking out, and following, the advice of insurance professionals who may or may not be knowledgeable enough to help them navigate the flood of new products coming on stream.

Life Insurance: not just a matter of life and death

Along with everything else in modern life, even death is becoming more complicated.

In past years, traditional life insurance was simple and straightforward. Premiums were paid, policyholders passed away, and beneficiaries received a payout. End of story.

Today, however, light-year advances in medical technology, treatment and disease control -matched by healthier lifestyles and a better-educated populace - have brought much longer life expectancy. Canadians born today, and even those who have been walking around for a decade or two, can realistically expect to someday receive birthday cards bearing three numbers rather than just two.

Unhappily, longer doesn't always mean a better quality of life. "The thousand natural shocks that flesh is heir to" described by Shakespeare in the seventeenth century, still apply at the close of the twentieth. The only difference is, today those shocks have time to develop at a more leisurely pace.

Each year, 125,000 Canadians develop cancer. In fact, there has been a one per cent increase in the incidence of cancer every year since 1970.

One in every four Canadians will develop heart disease. And 75,000 Canadians suffer heart attacks each year.

Fifty thousand Canadians suffer some form of stroke each year, one-third of them under the age of 65. Although 75% will survive the initial stroke, 60% of those survivors will be left with a disability.

Fifty thousand Canadians have Multiple Sclerosis. One in every four Canadians will suffer from kidney disease. Six hundred cases of paralysis are reported each year.

Currently, some 161,000 Canadians are affected (and will be incapacitated) by Alzheimer's Disease.

This litany of doom becomes even more daunting when diseases such as HIV and AIDS are taken into account.

So while the overall rate of mortality may be down from previous generations, long-term disability is certainly up. And as people benefit from new technologies and techniques that enable them to survive medically, the darker, looming question becomes whether they will survive financially? Individual needs and circumstances are now as numerous and as varied as the number of policies being written.

In response to this, the insurance industry has been remarkably creative about bringing products more into line with the realities of a changing society. To their credit, they have developed and refined new types of insurance which were unknown a generation or two ago.

Income Replacement

The single greatest asset most individuals possess is the ability to earn an income, and most people predicate their long-term planning on the assumption that they will continue to earn a regularly increasing income.

But if accident or illness strikes and the income stream dwindles to a trickle, income replacement insurance can salvage lifestyles; and protect futures. In doing so, modern income replacement pays benefits within highly flexible criteria - ranging from lifetime total income replacement for the loss of sight, hearing or speech - all the way through to the income replacement available to designated professions such as doctors, lawyers and architects, who can receive benefits even if disability or illness forces them into working at another occupation.

In between lies a smorgasbord of options such as COLA (Cost of Living Adjustment) riders, pension riders to maintain the growth of retirement savings during the disability period, and recovery benefits to supplement partial wages earned during a part time return to work.

The eligibility for disability and long-term income replacement offered by most insurance companies is clearly defined and reasonably straightforward. With the help of a knowledgeable insurance professional, prudent consumers should be able to arrange coverage for virtually any imaginable scenario that might befall them.

Critical Illness Insurance

When a life-threatening disease is diagnosed, Critical illness insurance can provide some much-needed physical comfort as well as a psychological serenity that frees up a patient to confront, and deal with, their condition.

Critical illness coverage can provide the insured with lump sum payments to obtain medical treatment that is superior to, and more comfortable than, the basic, no-frills treatment available through government health insurance services. 

Some egalitarian critics decry any special treatment which smacks of elitism, or which resembles a two-tiered approach to what they contend is supposed to be a system of universal health care. But proponents of supplementary medical insurance argue that a life-threatening critical illness is often finite and becomes, therefore, a quality-of-life issue in which the individual should have the dignity of choice.

Depending upon the nature of their illness, or the stage of their treatment, policyowners who qualify for critical illness insurance can also use their benefits in other ways, at their discretion.

For some, additional funds could provide for the purchase of a new vehicle to alleviate the discomfort of trips to and from chemotherapy treatments that have become unmanageable by public transit. For others, funds could be used to install wheelchair access, stair gliders or other labour-saving equipment in the home.

And for still others, perhaps those diagnosed with a terminal condition, critical illness insurance can help them enjoy precious time in any way they feel is appropriate, whether through travel to reunite with family and friends, or redecorating the house into a brighter, more comforting environment.

First rising to popularity in South Africa and Europe a few years ago, critical illness insurance arrived in North America only recently, yet it has caught on with the force and speed of a good idea whose time has come. In 1994, only one insurance company in Canada sold critical illness insurance, but by the end of 1998,17 companies were making it available, having sold a total of 7,000 policies. Although there have been mixed forecasts of how quickly critical illness is catching on in this country, industry analysts agree that demand will soar with increased consumer awareness.

The concept of critical illness insurance has resonated with many as a particularly humane and evolved approach that rises to new levels of dignity and civitas which are in touch with the consumer's spiritual, as well as financial, needs.

Viatical Settlements

A recently introduced concept still largely overlooked by Canadian insurers - even though it's finding growing acceptance elsewhere - is the notion of viatical settlements.

A viatical settlement is the money received from the sale - to a third party - of a life insurance policy written on the life of someone who has been diagnosed as terminally ill.

Throughout North America, viatical settlement companies purchase policies at a discount (usually paying from 50% to 85% of the full face value) and the insured receives a lump sum payment. The company then becomes the beneficiary as well as the owner of the policy, pays all future premiums and collects the proceeds when the insured dies.

Some 50 companies throughout the United States currently deal in viatical settlements, purchasing policies totaling up to $500 million a year in face value. Some estimates predict sales of over $1 billion across the U.S. by the year 2000. Here in Canada, even though sales of life insurance policies to third parties are prohibited in six out of ten Canadian provinces, the four that allow such transactions have accounted for $10 million in viatical settlements over the past year. How large would that demand grow in this country if heavily populated provinces such as B.C. and Ontario allowed viatical settlements?

Despite moral or ethical issues raised by opponents over how ghoulish or opportunistic viatical settlements may appear, growing demand provides obvious enough proof of their popularity and perceived usefulness. Often, people with a terminal or debilitating illness are unable to work, and have to juggle priorities to choose between food, shelter or medical care. Individuals in such situations -particularly if they have no surviving family or friends relying on policy payouts - would likely be grateful for the proceeds from a viatical settlement to help them live out their last few months in comfort and dignity.

And although viatical settlements have historically focused on the terminally ill, there are new trends emerging by which older, healthy policyholders who feel they no longer need the coverage - but want to recoup something of the premiums they have paid for years have also been selling their term and whole life policies to viatical investors.

Given the apparent pent-up demand for this type of approach, perhaps Canada's insurance industry should consider how they could be more responsive to (while capitalizing upon) this growing market segment. It could be argued that just making the option of a viatical settlement available is important to the individual's right to choose. At the very least it seems to point out the need for Canadian insurers to liberalize the living benefits already available within their current product lines.

Other Living Benefit Choices

Viatical settlements may not always be the right solution for those who are dying. There may be tax or other cost implications that make this option unworkable. If so, there are still several creative options open by which the policyholder could:

  • Borrow from the insurance company against the cash value of the policy,
  • Cash out the policy, based on the cash surrender value,
  • Borrow from a financial institution, family or friends, using the policy to secure the loan, OR
  • Apply for a living benefit advance from the insurance carrier. These are normally available at fifty per cent of face value up to a maximum of $50,000 and can be disbursed once eligibility has been established with a doctor's certificate declaring that the insured has two years or less to live.

  • Capital Benefits

    In addition to features such as income replacement, critical illness and other forms of disability insurance, some universal life policies also give policyowners the option of claiming capital benefits. If the insured becomes occupationally disabled, is afflicted with a critical illness, or suffers the loss of independent existence, they may claim capital benefits to enhance the quality of medical care or support they need.

    These benefits are normally paid as a disability benefit, but the maximum capital benefit that may be claimed generally cannot exceed the value of the policy's accumulation fund. Both the life benefit which would be otherwise payable, along with the accumulation fund of the policy, are, of course, reduced by the amount of capital benefits claimed.

    The appeal of capital benefits lies in their flexibility. Because they are paid as a disability benefit - either as regularly-scheduled income or in a lump sum -their payment does not result in a taxable disposition.

     Integration under the UL umbrella

    Because these various types of insurance products have emerged in response to specific market demands - and considering that they were introduced at different times - they have tended to be stand-alone in nature.

    Most recently, however, the trend has been to integrate these products all into one policy something that is ideally suited to the flexibility and accommodation of a universal life vehicle. But although they may all be accommodated within a single policy, the range of permutations and computations on how these features may eventually be used by the insured can be confusing.

    As these options start to swirl, the boundaries between what's expedient for today, as opposed to what's more prudent for tomorrow, can easily blur. Confusion may goad people into making bad choices they'll regret later.

    Here again, the guidance of a knowledgeable, reliable insurance professional is critical to making good choices that will best benefit the insured and their estate.

    "Great Products, Poorly Sold"

    Many have praised the insurance industry for designing and developing innovative products geared to contemporary realities. And consumers with special needs likely appreciate the range of products available.

    Yet no matter how prolific the industry has been in creating exciting new products, concerns loom over how they are brought to market. While some bemoan the mountain of information accompanying these products, others struggle to find meaningful guidance and advice that will help them choose the right insurance for their needs.

    In this regard, the insurance industry has long been criticized for having "great products, poorly sold." Consumers sense there are policies available that could provide the "perfect fit" - but many feel caught between a lack of information on the one hand, and an overload of eye-glazing minutiae on the other.

    Given the growing intricacy and complexity of insurance products being introduced, it's understandable that individual insurance brokers and agents have come under closer scrutiny to gauge their depth of product knowledge and their effectiveness at deciphering which policies, features or options would best serve their clients' particular needs.

    That scrutiny is beginning to build. Several provinces such as British Columbia, Alberta, Ontario and Quebec have moved to introduce new licensing and distribution arrangements to ensure enhanced levels of consumer protection and greater industry responsibility for the market conduct of individual agents.

    General industry response to regulatory measures such as these has echoed the concern that, in principle, those who are not qualified to give advice about insurance should not be permitted to do so in a professional capacity.

    Securities practitioners, for example, are not allowed to give advice regarding investments unless they are qualified (and certified) to do so. Many feel that the same should be true within the insurance industry, calling for some standard by which those who are dispensing professional advice for which they (directly or indirectly) charge a fee, should be required to have an appropriate degree of qualification for doing that.

    With the flood of innovative new products coming on stream, that qualification becomes even more important.


    The enduring brilliance of a free-market system is its responsiveness in striving to give consumers what they want. This inevitably means that the insurance industry, along with most others, will continue to change and evolve as a reflection of how society itself is changing.

    And yet, as encouraging as it is to see innovative new products made available for every conceivable consumer need, the complexity of those products and their potential long-term impact require ongoing attention.

    There must be a workable balance between the insurance company that designs these products, the insurance agent who sells them and the consumer who buys them with certain specific expectations.

    Considering what's at stake, this "workable balance" becomes more of a partnership in which each of the stakeholders must exercise careful due diligence, adherence to process, and respect for each other's role in that partnership.

    In addition to designing and manufacturing leading-edge products which address consumer needs, insurance companies must always support and promote these products with clear, understandable materials that fully explain how they will perform and what can be expected of them.

    The insurance agent must be the active counselor whose mission is to understand completely how these products work and how they may be selected and adjusted to fit the client's specific needs. The agent must provide service that makes maximum use of the variety of options available to come up with the perfect solution for their client. The advice they give must be solid, reliable and effective - and always in the best interest of the consumer they are selling to.

    And for their part, consumers must assume a reasonable responsibility to understand what they are buying. They must satisfy their most basic concerns that the product being purchased is the most appropriate one for their needs; that the agent selling it to them has the most accurate information possible about their specific circumstances, goals and objectives; and, that these other two partners of the triad are fully aware of the client's expectations of the product.

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    Last modified: April 18, 2012