Flurry of Activity in the Special Risk and Final Expense Insurance Market

The Canadian market for and of Special Risk term and permanent life insurance, as well as CI is experiencing substantial growth and increased competition. Market growth, as well as the range of products and product permutations, has accelerated recently - as has the number of life insurance companies and "private label" designers and marketers of Special Risk life insurance and CI product offerings.

Growth in the Special Risk market can be attributed to various factors, including:

• Aging of the general population, and particularly of the "graying" of the post-war "baby boom" generation;
• Increased lifespan;
• Increased accumulation of at-risk "dormant wealth", particularly among "baby boomers"
• The introduction of new, and stiffening of, pre-existing "grave robbing" taxes by Federal and Provincial governments (such as, for example, Ontario's EAT (Estate Administration Tax), hiked marginal income-tax brackets (that may trigger consequential to such as "deemed dispositions" at death, increased exposure of previously shelterable "dormant wealth" to taxation, etc.));
• Increased "Final Expense" costs that include legal, accounting, and administrative costs in addition to the actual costs of internment;
• Inadequate forward thinking in financial planning during prior years (for example, falling for the fallacy of life insurance only being needed during one's income-earning years, failure to recognize the long-term erosive impact of inflation on the transactional value of the dollar unit, purchase of inadequate life insurance in the past due to over-emphasis on initial premium costs, etc. (these to be covered in future articles))

Consumers who have previously been (mis?)lead by the media and others to opt for "cheap" term life insurance - based on initial period premiums, and often ignoring the length of time during which coverage will be needed, renewal costs and/or qualitative aspects such as renewability and convertibility - are nevertheless facing the reality of continued need for life insurance. All too often, however, the harsh reality of limited availability or lack of availability of "normally-underwritten" offerings (due to personal health and/or age and/or other factors) presents itself. One "solution" for consideration in such cases (though not necessary the full or only solution) is insurance coverage through a Special Risk product offering.

Not so simple...

The matrix of Special Risk product offerings includes multiple dimensions and dimension permutations that add complexity and deserve to be kept in mind.

The first dimension: Qualifications and selection of risks

• Absolutely Guaranteed Issue: No underwriting questions asked;
• Guaranteed Issue: Only a few basic underwriting questions are asked. If the application questions are answered correctly, and to the satisfaction of the issue guidelines, this guarantees the issue of the insurance policy contract;

The Absolutely Guaranteed Issue and Guaranteed Issue offerings are sometimes referred to as "Instant Issue", though some of the Simplified Issue offerings may also be referred to as "Instant Issue" ...welcome to the confusing world of insurance sales lingo.

• Simplified Issue: A short list (but more than for Guaranteed Issue) questions are asked, and usually there is no paramedical nor medical exam. If the answers to the application questions satisfy the issue criteria, the policy contract is quickly issued.

Then, we come to the second dimension in the matrix. The policy benefits and schedule. In that we have:

• Graded or Deferred Benefit: In simple terms, during the initial policy years (in most cases, the first two policy years), the policy will pay the "face amount" (amount of insurance purchased) for "Accidental Death" only (Pass, if you wish, on the sales brochure or online promo but DO read the policy contract, and don't be shy to ask for clarification if needed!) In the event of death of the life insured other than by accident (see policy contract for definition(s) of "accidental death") during the "graded" or "deferred" benefit period, and depending on the wording of the policy contract, the death benefit will be either zilch, nothing, and nada, OR a percentage of the face amount OR refund of all or a percentage of the premiums that have been paid, OR refund of all or a percentage of the premiums paid - with a contractually specified interest. ...It's all spelled out in the policy contract; read and understand it.
• Level Benefit: In simple terms, the life insured is covered (subject to policy contract wording) for the full face amount of insurance that was purchased as soon as the application is approved, the premiums are paid, and the policy is delivered. This, regardless of the cause of death (other than causes excluded in the policy contract wording). Some contracts (see contract wordings) may feature added coverage over and beyond the face amount in the event that the death is caused by "accident" (see contract wording).
• "Indexed" Benefit: In simple terms (and as stipulated in the policy contract wordings and values schedules), the amount of insurance will increase over part or the entire duration of the policy while in force.
• Decreasing Benefit: In simple terms (and as stipulated in the policy contract wordings and values schedules), the total amount of insurance will decrease over part or the entire duration of the policy while in force.

The third dimension: In that we have the dimension of the duration of coverage (limited term OR "for life"), along with matters of renewability if the type/duration is limited "term". The most common are:

• 5-Year Term Level premiums for all or part of the initial 5-years, escalating at the end of each 5 years (if the coverage is renewable) and with coverage and premiums terminating upon the life insured reaching a contractually specified "final expiry" date;
• 10-Year Term: Similar to the 5-Year Term but with premiums escalating at the end of the initial 10-year period, and at the end of contractually stipulated periods thereafter (if the contract is renewable), and with coverage and premiums terminating upon the life insured reaching a contractually specified "final expiry" date;
• 15-Year Term: Similar to the 10-Year Term but with premiums escalating at the end of the initial 15-year period, and at the end of contractually stipulated periods thereafter (if the contract is renewable), and with coverage and premiums terminating upon the life insured reaching a contractually specified "final expiry" date;
• 20-Year Term: Similar to the 10-Year Term but with premiums escalating at the end of the initial 20-year period, and at the end of contractually stipulated periods thereafter (if the contract is renewable), and with coverage and premiums terminating upon the life insured reaching a contractually specified "final expiry" date;
• 25-Year Term: Similar to the 10-Year Term but with premiums escalating at the end of the initial 25-year period, and at the end of contractually stipulated periods thereafter (if the contract is renewable), and with coverage and premiums terminating upon the life insured reaching a contractually specified "final expiry" date;
• 30-Year Term: Similar to the 10-Year Term but with premiums escalating at the end of the initial 30-year period, and at the end of contractually stipulated periods thereafter (if the contract is renewable), and with coverage and premiums terminating upon the life insured reaching a contractually specified "final expiry" date;
• Level Term to 65: Coverage and premiums will continue to the year in which the life insured attains age 65 (see contract wording which also defines what "age" is). This type of contract is not normally renewable; however, there may be exceptions to the norm (WATCH OUT!!! Read, AND understand the contract wordings);
• Guaranteed T100 with Premiums Paid for "Life": Coverage and premiums will continue for life or to a maximum length ending with the insured's "age" of 100. If the life insured is alive at age 100 some T100 policies "mature", meaning that the face amount will be paid to the policyholder upon the life insured surviving and being alive at age 100.
• Guaranteed T100 with Premiums Paid for a shorter period (usually 20 years): Premiums are payable for the duration of years as specified in the policy contract while coverage will continue for life or to a maximum length ending with the insured's "age" of 100. If the life insured is alive at age 100 some T100 policies "mature", meaning that the face amount will be paid to the policyholder upon the life insured surviving and being alive at age 100. There are normally no "non-forfeiture" values in T100 policies. This means that the policy cannot be "cashed in" for a "cash value" nor can the premium payments be terminated earlier than contractually stipulated in exchange for a reduced amount of insurance remaining in force.
• Guaranteed Whole Life, Life Pay: This is similar to the Guaranteed T100; however, the policy includes Cash Values (cash out values) and/or Reduced Paid Up Insurance values commencing at the end of a contractually stipulated policy year and continuing (and normally increasing) thereafter.
• Guaranteed Whole Life, with Premiums Paid for a shorter period (usually 20 years): This is similar to the Guaranteed T100 with a shortened premium paying period. However, and as with Guaranteed Whole Life, Life Pay, the policy includes Cash Values (cash out values) and/or Reduced Paid Up Insurance values commencing at the end of a contractually stipulated policy year and continuing (and normally increasing) thereafter.
• Adjustable Whole Life, Life Pay: This is similar to the Guaranteed Whole Life, Life Pay; however, the amount of insurance and/or the premiums to be paid may vary over the policy years (see policy contract wording).
• Adjustable Whole Life, with Premiums Paid for a shorter period (usually 20 years). This is similar to the Guaranteed Whole Life with premiums paid for a shorter period; however, as with the Adjustable Whole Life, Life Pay, the amount of insurance and/or premiums to be paid may vary over the policy years (see policy contract wording).

The fourth dimension: The policy contract:

If you have read this far, you probably noticed my repetitive suggestions - actually urgings - to read the contract wording, ask questions if anything is unclear, and to understand what is in that contract that you will be paying for. The contract is the agreement between the policyholder and the insurance company that governs and will govern over the responsibilities and duties of each party. The time to read, ask questions and to understand what is and what is not covered, how much and when, etc. is before purchase, not left for discovery at time of claim.

Policies of "insurance on the person", including normally underwritten and Special Risk life insurance and CI policies differ, and sometimes quite substantially. This is so even for policy "types" that may superficially seem simple. Take a 10-Year Term policy, for example... One contract may say: "This contract may be exchanged with any permanent life insurance contract (then) offered by the Company". Another contract may say "This contract may be exchanged with any permanent life insurance contract (then) offered by the Company for exchange purposes". Just three words but these can mean the difference between the T10 being really convertible or practically non-convertible.

More liberal contractual provisions are, as expected, priced into the premium; however, the benefits may outweigh the costs and may translate to the difference between having or not having the expected and perceivably paid-for coverage when needed.

The multi-dimensional maze of Special Risk life insurance product offerings can be quite baffling and prone to error. To assist professional insurance and financial advisors in their efforts to serve the best interests of their clients, CompuOffice Software Inc. has designed and developed Canada's most advanced Special Risk products computerized research module. This module, which is included with, and is part of, the LifeGuide Professional software, is complemented with Canada's largest, most comprehensive and most detailed database of Special Risk life insurance and CI product offerings. The Special Risk products' module of LifeGuide addresses each of the dimensions mentioned in this article, along with the various offered permutations marketed by the largest number of life insurance companies and "private label" product designers and marketers.

The Special Risk module of LifeGuide addresses both quantitative and qualitative aspects of each product. As a consumer, and as one having over 40 years of experience in the fields of life insurance and financial planning, I believe that LifeGuide's Special Risk module is a "must have" for any insurance and financial advisor striving to serve the best interests of the client in situations where Special Risk (Guaranteed Issue and/or Simplified Issue) life or CI coverage is considered to potentially be the solution or part of the solution. Below is a screen capture image of the main screen ("dashboard" if you wish) of LifeGuide's Special Risk module.

I plan to write further on the topic of Special Risk life and CI product offerings as the market and range of offerings continues to expand, and as new dimensions and/or aspects are introduced.

For now, I'll quickly address one that was introduced recently by the "private label" designers and marketers "Canada Protection Plan" ("CPP") [Not to be confused with the same acronym for the better-known acronym for "Canada Pension Plan"], who market Special Risk products that are underwritten by Foresters Life. CPP now offers a $0.00 (zero) premium for the first month when the purchaser opts to finance the premium in monthly fractional payments.

The effective annualized financing cost rate for premium payments for Foresters-underwritten Special Risk products is 18.6%. This is in line with the effective annualized financing rate applied by nearly all insurers in Canada for monthly financed fractional premium payments, and corresponds to a monthly fractional financing factor of 0.09.

With CPP's zero dollars first month's premium (Please note that this zero dollars for the first month's premium is only applicable in the first year of a newly issued policy), the remaining 11 monthly financed fractional premiums add up to less than the annual premium would be if paid in a lump sum. Therefore, if the selected Special Risk product is one of the Foresters-underwritten products marketed by CPP, one may wish to consider opting for the monthly fractional premiums during the first policy year only, and then to change payment of the premiums to annually starting with the second policy year. That is, unless the client's financial situation or circumstance is so dire that the client is unable to pay the annual premium in a lump sum or to secure a loan for the annual premium at a lower effective annual financing rate than the 18.6%

This is all for now... more to come.

Notice and disclaimer: This article in the whole and in any part is intended to be general in nature. It is not intended to suggest or recommend any specific action or inaction in any specific situation or circumstance. Each situation and circumstance is unique, having it's own unique and individual "fingerprint", and deserving consultation and advice by duly qualified, E&O insured, licensed, and adequately research-equipped financial advisor. This article is current as of the date on which it was written (October 28, 2016). Specifics mentioned in the article, including figures in the included image are subject to change. E.&O.E.