If you talk to most life-licensed financial professionals, they will always say that the best time to buy life insurance is today. The reason for that is simple: we all have a story of someone who waited too long. While waiting, that person could have been diagnosed with a chronic sickness or ailment like arthritis, fibromyalgia or diabetes. That person could have been diagnosed with something more life threatening like cancer, heart attack or stroke; or they could have waited too long and died. During my time in the industry, I have come across all of these circumstances and more.
However, in the next two years, three additional reasons to buy Life Insurance have cropped up:
COVID, Interest Rates and likely changes in Tax Policy.
So let’s start with COVID. According to the National Center for Health Statistics (a part of the U.S. Centers for Disease Control and Prevention), the life expectancy of an average American at birth in 2020 was 77.8 yrs. In 2019, the number was 78.8 years. When I heard that stat for the first time, I was shocked and the reason was simple: this decrease was the first such decrease for the average American since World War II. In losing on average three years, Black Men had the biggest decrease. White women, in losing 0.7 of a year, saw the smallest decrease. However, from Black Men to White Women, one thing was true: every major demographic group saw a decrease in their life expectancy.
From a Canadian point of view, this is problematic since Canadian Life Insurance Carriers usually have some exposure to the American Life Insurance Market. Some companies have direct exposure to it. Think of Industrial Alliance, SunLife, ManuLife, Canada Life and Foresters Life. They all sell insurance products in the US market. Most others have some indirect exposure because their products are reinsured by Canadian or American carriers (like Canada Life Re, Everest Re and Munich Re) who operate in Canada, the United States and/or Europe. So, either way, Canadian Life Insurance Companies are exposed to adverse outcomes in the US Life Insurance Market. Accordingly, if a company has some exposure to the American Market, that same company - that Canadian company - will see an increase in their costs. Costs, inevitably, will rise in Canada as they will in the US; and, as such, higher premiums will follow.
The second reason to buy a policy today is simple: interest rates are at historic lows. Some might be tired of hearing this (i.e. historically low rates have an effect on “everything”); however, let me point to some numbers to explain. From 1935 to 1968, the Prime Mortgage rate fluctuated between 4.5% and 6.0%. Then, they increased until 1981. In 1970, the Prime Lending rate reached 8%; and, by 1974, it reached 11.50%. By 1981, a record high was reached: 21.25%. So compared to today’s rates - from 1935 to 1981 - interest rates were crazy high.
Now, this is important because interest rates have an affect on the bond market and bonds are a huge part of the model of a typical Life Insurance Company. To be able to afford the large payouts made on Life, Sickness and Health policies; Life Insurance companies invest in big ticket, low risk opportunities. They fund mortgages, buy bonds and buy infrastructure. Life Insurance companies own large commercial and industrial buildings in major cities like Toronto, Calgary, Montreal, Vancouver, New York and Chicago. Consequently, when interest rates are going up - year upon year - and inflation is low, it is easy to provide a cheap life insurance product.
The problem is simple: we have not been in that environment for quite some time. Since the 1980s, we have been seeing decreasing interest rates. In 1990, the Prime Mortgage rate was 14.75. By September of 2001, the Prime Mortgage rate was 4.25%. In 2007, it hit 6.25%; but that was short lived. Because, by 2008, the rate was back to 4.25%; and, it hasn’t reached 4% since. At the same time, inflation was also on a largely downward trajectory. For an Insurance Company, this long term trend leads to only one thing: ever high premiums. Without the help of bond investments or growing commercial and industrial rents, Insurance Companies have to seek higher premiums to be able to fulfill the contracts that they have signed. Accordingly, one thing is true: over the short term, premiums on term and permanent policies will tend to go up. Thus, this is a good time to buy life insurance.
Finally, in Canada, in 2021, Tax Policy will provide the last best new reason to buy a Life Insurance Policy. Since the end of the Paul Martin Government in 2006, under municipal, provincial and federal governments, Canada has seen a huge increase in government spending. According to Pew Research, when Paul Martin left his Prime Ministerial role, the debt of all Canadian Governments equaled about 70% of our GDP. However, the two Prime Ministers since; Canadian Governments - as a whole - have managed to increase our debt-to-GDP to 90%.
However, to be optimistic, Canada is on the good side of this trend. In the same time period, Japan’s debt-to-GDP ratio jumped from 176% to 235%. Now save the United Kingdom, Canada has the best debt-to-GDP ratio in the G-7. For, “in 2018, debt accounted for 132% of GDP in Italy, 104% in the U.S., 98% in France, 90% in Canada and 87% in the United Kingdom”. Accordingly, if all G7 countries had a debt problem before the COVID 19 Pandemic, there will be no place to hide as countries start to increase their taxes, fees and other government revenues in a post-Pandemic world.
One of the simplest ways to increase government revenues would be to eliminate and/or restrict all existing loopholes. Rationally, Canadian Governments - both federal and provincial - would first look towards these strategies to fill in the debt to GDP gap. Between the 1970s and 1990s, Canadian Governments did all sorts of things to reduce their deficits and debts. This included creating the capital gains designation, creating new income tax brackets and surtaxes, increasing probate and estate taxes/fees, making registered accounts (like RRSPs) more restrictive and changing the tax rules around the creation of new Insurance Policies. In a world where Governments are looking for additional money, one doesn’t have to imagine what can happen.
Given all of that, Canadian Governments are likely to reduce the tax-sheltering benefits that Life Insurance provides. If you didn’t know, when you compare TFSAs, RRSPs and other registered accounts, one might be surprised to find that a Permanent Life Solution - either Whole Life or Universal Life - is comparable in its tax-sheltering properties to other registered accounts. Consequently, if Canadian Governments want to raise revenue, it makes sense to assume that they will go after all tax shelters with the same amount of energy. Or put differently, if you are going to reduce the power of one of them, you might as well do it to all of them. Since Canadian Governments have constantly changed the benefits of registered accounts but have never changed the benefits (including taxation properties) of an in-force policy, now is the time to lock-in the present taxation benefits.
So there you are. You now know the three “new” reasons to buy a life insurance policy in 2021. The only question now is simple: will you act on this information or not?
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