Are permanent life policies being pushed too hard?

by Leo Almazora09 Oct 2020

PolicyMe, an online life insurance platform and advisor, has released a new survey suggesting that Canadians are being sold the wrong life insurance coverage.

In an online poll of roughly 1,000 Canadians with life insurance, PolicyMe said 49% of Canadians that bought their policy through an advisor got a permanent policy.

The results varied across age groups, with 40% of advised policyowners aged 18 to 34, 41% of those aged 35 to 54, and 62% of those aged 55 and above having a permanent policy.

When asked whether they’re sure they made a good decision, 86% of policyowners with permanent life coverage expressed confidence that they had the right fit. But according to the co-founder and CEO of PolicyMe, there’s reason to question that confidence.

“There's an elephant in the room when it comes to life insurance,” says Andrew Ostro, Co-Founder & CEO of PolicyMe. “Many Canadians seem to believe they need permanent coverage, but the reality is that permanent life insurance is a very specialized product that only meets the needs of a very small percentage of the population — most people are sufficiently covered with the more flexible and affordable term life insurance.”

PolicyMe cited a handful of reasons why most Canadians should not opt for permanent life insurance. Because permanent insurance can cost up to 10 times as much as a term policy, it said that insured people will overpay during the early years of policy ownership for the fact that they’re much more likely to die during the later years of their policy.

Another reason is the significant added complexity in permanent insurance products, which frequently include cancellation charges, hidden fees, and other terms that are stipulated in fine print that many consumers won’t understand.

It added that permanent life insurance is a type of “forced savings” whose rate of return is typically lower than what they’d get from an RRSP or TFSA. Additionally, those who contribute money into a permanent life policy will find it hard to pull it back in case they face a sudden expense.

Nearly 88% of universal life policies never pay a claim, PolicyMe added, as people allow their permanent policies to lapse typically because of a financial setback that makes the premiums unaffordable for them.

According to PolicyMe, brokers typically receive five to 10 times more commission from selling permanent coverage than they do selling term coverage, which hurts their credibility as they’re strongly incentivized to do the former.

“It's time that we see this for what it is: bad advice that's costing Canadians millions,” Ostro said.

The survey also found growing interest among Canadians to get life insurance through online advisors. While only two per cent of respondents said they got their policy online, 51% are now saying they would take the chance to buy life insurance online if they were getting it today.

Two thirds (65%) of respondents aged 18 to 34 said they’d buy online next time they have the chance, and two fifths (39%) of those aged 55 and over said the same.