Why Insurance May Become More Affordable
By Ryan Goldsman, CFP®, PAIP®
It seems like another lifetime, but several years ago I was a licensed financial planner and delivered financial plans to individual clients. The hardest part of the entire package was the insurance solution. It was post-2008 and interest rates were lower than ever. Dovetailing with low rates was the impact of a number of accounting standards that required insurance companies to have more capital on hand for any given amount of coverage. Basically, the price of insurance had increased substantially.
At the time, Canadians were still feeling hung over from the housing party (and subsequent crash) which delayed adult life for far too many.
Typically, insurance is purchased when protection is required. It means insuring expensive items such as a house or a car, or potentially one’s earning power.
Whether a person is married or not, and has dependents or not, purchasing various forms of income protection is most often at the top of the list. It’s called morbidity insurance. It covers you when a significant event occurs and you continue living.
In case of death, then life insurance is the optimal solution. It provides a financial benefit following someone’s passing in the form of a lump sum payment. The money is most often used to repay debt and provides for the remaining family of the deceased. The more debt and the greater number of dependents one has, then the more insurance they need.
Looking back, it became the norm for parents to fly without a net, or potentially have too little coverage. In today’s economy, there are still too many parents who are taking unnecessary risk, but that segment is far less than before. As interest rates increase and the economy continues to perform well, the insurance sector may just be the place to be – for financial professionals and investors alike.
A word for Investors
Insurance is an intricate and complicated business that’s based on risk and probabilities. From a very high level however, the business model is very simple. The insurance company takes in money in the form of premiums and then must pay claims from that pool of money. From that same pool of money, they must also pay their day-to-day expenses.
Where investors may benefit, is in the period of time between which the insurer receives the premiums and pays out the claims. During this time, the money they have at their disposal is invested in a variety of investments, typically lower risk, fixed-rate investments, which earn a return.
Since interest rates have increased, so too should the returns earned by the insurers. If this increase in revenue flows to the bottom line, then investors may be handsomely rewarded by higher share prices and higher dividends.