Wealth Strategies: Insurance costs are likely on the rise - Sooner than later

DROP IN RATES SIGNALS TROUBLE FOR CANADIAN LIFE INSURERS

Interest rates are closely tied to insurance* rates and given the extremely low interest rate environment we’ve been experiencing, premiums are far more likely to continue increasing. Especially with the Bank of Canada’s recent rate cut from 1% to .75%. For many insurers, increasing premiums has been progressive but the recent rate cut will likely encourage this again sooner than later. Why is this so? Well, actuaries are responsible for making financial projections for insurers based on certain assumptions with interest rates definitely being one of the most influential. This then helps determine product structures, hedging requirements, costs, financial reserves etc. When interest rates move however it directly affects insurers in regards to these projections and assumptions. If rates are low and going lower this in turn means less interest earned in reserves and portfolios, in turn meaning less profitability and therefore increased costs to do business. This is lastly handed to Mr. and Mrs. Consumer in the form of an increased insurance premium.

Some types of insurance* will be more affected than others, especially those reliant on the profitability of the insurer like whole life insurance*, which issues dividends to the contract holder based on the insurers’ profitability. Products that are less rate-sensitive would be those that offer non-guaranteed premiums such as long term care insurance*. On the opposite end of the spectrum is universal life and variable annuities which would both be significantly affected given their fixed premiums or payouts. To be fair, any longer term insurance* product will be affected due to lower interest rates. This therefore makes it an opportune time to review your current insurance* coverages and needs, also bearing in mind of course that we’re all living longer. With the latter in mind we’ll therefore most likely require either more insurance*, for a longer period of time, or additional types of insurance*.

Additional types of insurance* may include long term care and critical illness (falling under the category of living benefits), which are not as common as life insurance*, but with our aging demographics are increasing in both popularity and relevance. Critical illness insurance* is a lump sum amount which can provide you with the financial means to acquire treatments as well as additional medical consultation, diagnosis, advice and treatment options from medical professionals. This can provide one with peace of mind and protect your assets from potential depletion. Long-term care insurance* on the other hand is to help fund the services and support to maintain day-to-day activities if one loses their independence from a stroke, illness such as Alzheimers or Multiple Sclerosis or simply due to aging. The total amount of insurance* purchased then provides a daily benefit amount to the insured.

Given our current interest rate environment, taking a closer look at ones insurance* coverage and insurance* needs would be a worthwhile exercise at this juncture, and one that a qualified financial advisor can assist you with.

 

* Offered through Canaccord Genuity Wealth & Estate Planning Services