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The History Of Term Life Insurance In Canada

06/14/23

Transcript

This video is dedicated to the memory of J. Arthur Grimes, Buck Scott, and Reg Valliere. They pioneered the distribution of term life insurance in Canada against the resistance of an entire industry in order to benefit their clients. They were also kind men who took the time to nurture and mentor young people in the industry such as myself. The Term Guy and what we are able to do in the industry today is a result of their efforts.

1756
Welcome to the complete history of term life insurance in Canada.

Curiously term life insurance policies that we have in Canada today didn’t just happen organically. There’s actually a number of cultural changes, flash points in the industry, and influential people that we’ve seen through the years that have given us the robust marketplace and the types of term life insurance policies that we have in Canada today.

1756 JAMES DODSON, ACTUARY
The first documented evidence of term life insurance goes back to 1756. Now back then, an actuary by the name of James Dodson wrote a paper titled First Lectures on Insurances. That paper talks about pricing a whole bunch of different types of life insurance and it just kind of tangentially mentions 1,3,5 and 7 year term insurance. Now, I believe that it was meant as more of a technical exercise. It wasn’t even called term life insurance, it was called term certain. And the reason for that is, back then, mid 1700’s, we were really pre- the industrial revolution. And people didn’t go out and work 9 to 5 and bring home a paycheque and support their family. Life was very much different back then. So there was limited need for term life insurance.

1800’s-1900’s The Need For Term, Industrial Life Insurance
So that stayed the same until the late 1800’s, maybe the early 1900’s. Now we’re post the industrial revolution and people in fact are going out to work 9 to 5, bringing home a paycheque and supporting their family. So we now actually have a need, culturally, for term life insurance.

Unfortunately the answer for term life insurance wasn’t term life insurance back then. The response to people working was actually something called industrial insurance.

Now industrial insurance were small policies that covered life insurance and disability insurance, generally covered your whole family. And curiously and perhaps horrifyingly, the premiums were collected by your insurance agent weekly. That’s right, every week you got a knock on your door from your life insurance agent, “where’s my money, gimme my money for your life insurance”. So that existed up until the late 1800’s and early 1900’s.

Now let me just give you some proof of that. Here’s an actuarial book from then late 1800’s. It only talks briefly about 5, 10, 15 and 20 year term. Here’s another book, a very technical book, called First Principles of Insurance from the early 1900’s. Sorry, this book doesn’t even mention term life insurance, it talks about all the other types of life insurance.

Here’s an agent book from the late 1800’s He talks about his life insurance policies that he sells to his clients. Term life insurance isn’t even mentioned in this book.

Here’s another book from the early 1900’s. This book is more of an agent book. It talks about term life insurance and there’s two curious points I’d like to make.

First of all, when he talks about term life insurance in this book he mostly contrasts it with permanent life insurance, and kind of the intent is, you really should be getting permanent insurance.

But he also mentions not just term insurance, but renewable and convertible term insurance. And he mentions renewable term really wasn’t a thing back in those days even though today it is. So, renewable and convertible is something we’re going to see from the 1900’s right up through to today. There’s a lot of discussion and back and forth about this. So, renewals back in the early 1900’s,

weren’t really a thing The agent does mention however that conversions or convertible term is a very important feature. This is going back over 100 years.

So that takes up to the early 1900’s. Up to about 1950 or so when term life existed but was very much a niche product.

1960-1980
1970’s – REBELS IN THE INDUSTRY – RISE OF THE BROKER
Lets move to the 1960’s and 1970’s. At that time life insurance agents in Canada were tied to one specific company. You had to sell that life insurance company’s products. If you wanted to sell another life insurance company’s products, you needed a piece of paper every time you did this called a Single Case Release. It was permission from the life insurance company for you to sell another company’s product. So as you can imagine, life insurance agents were required to sell their company’s products and specifically what the company wanted you to sell which wouldn’t have been term life insurance.

Then something happened.

A company called Transamerica Life started sponsoring agents and instead of requiring them to have a single case release for every single case, they handed them a full stack of pre-signed single case releases and said “Here you go, don’t even talk to us, go sell whatever you like, whenever you like, and you’re probably going to sell a lot of our stuff because we’ve got really good term life insurance policies”. And sure enough, that’s what happened.

People such as Art Grimes and Buck Scott were the very first life insurance brokers in Canada sponsored by Transamerica and they started doing what was best for their clients which in many cases was starting to sell term life insurance.

Now, I don’t want to minimize how important these people were in the creation of the environment we have today. These people were the forefathers of term life insurance sales in Canada.

In fact, they were completely outside the industry. The industry didn’t work that way, the regulations didn’t work that way. These people were bucking the trend.

And it was so important to them to be able to do this that Buck Scott actually mentions this in his obituary. Let me read you a line from Buck Scott’s obituary:

“Buck was proud of pioneering term life insurance in Ontario and later helping usher in the brokerage system that allowed him to serve his customers best.”

So his family recognized his important contribution to the system we have in place today as do I.

1980’s Computers Allow Rebel Brokers to Comparison Shop Prices
Now, in the 1980’s something happened. Again, this is a bit of a flash point. We have the introduction of the personal computer. And what the personal computer let us do was it let you compare prices across a whole variety of companies. So these same rebel Transamerica brokers that were out there selling term life insurance could now actually shop out, do those premium comparisons that are all over the internet today, and shop out the 60 plus life insurance companies and start selling the cheapest.

So in the 80’s, the introduction of the personal computer let these rebel brokers start selling based upon cost. Prior to that this wasn’t possible.

So now we’re in the 1980’s.

1980-1990
1980’s – AL Williams and David Chilton awaken Canadians to Term Insurance
Now in the 1980’s two very influential people emerged in Canada, actually one of them came from the states that helped drive consumer awareness of term life insurance.

The first person’s name was Art Williams or A.L. Williams. He pushed out a sales strategy called buy term invest the difference. Now this concept isn’t perfect but one thing it does do is that it polarizes people. It cuts everybody right down the line, you’re either for term insurance or you’re against it. And of course since he was promoting term insurance the answer was you should only ever buy term life insurance.

It was a little bit of a controversial sales strategy but one thing it did do was it really was easy for consumers to understand and they got the idea that they really should be looking at term life insurance first.

The second influential person was a fellow by the name of David Chilton. David Chilton wrote a book called The Wealthy Barber. This book was wildly and spectacularly popular. Everybody bought a copy. I’ve got a signed copy because I met Dave when he wrote the book.

Here’s what he has to say, here’s a direct quote from his book. Now there’s two interesting points about this quote.

“Although as you pointed out, there are a number of different types of policies, there’s only one that you, Cathy and Tom, will probably ever need – renewable and convertible term. “

So the first thing that’s noteworthy about that quote is he says you really should be buying term life insurance. There’s only one type of policy that you need, and that’s term life insurance.

Secondly he doesn’t just say term life insurance. He says renewable and convertible term. And I think that’s important, I don’t think David Chilton said that arbitrarily. I think he was being very specific. You don’t want just term insurance, you want renewable and convertible term which we already saw another author talking about this going back to the early 1900’s if you remember the earlier part of this video.

So, Art Williams, David Chilton in the 80’s, two very influential people. What they was, they brought term life insurance to the awareness of Canadian consumers.

Rise of American Style Term Life Policies, Death of 5 Year Term
Now, around about that time, late 80’s and early 90’s we had a shift in the marketplace.

What happened was, a number of American life insurance companies moved into Canada and brought their American types of term life insurance into Canada. And American term policies and Canadian term policies at the time were not the same.

So the way Canadian policies worked at the time was, you’d take a medical exam, get your policy for the term, lets say 5 years. And at the end of the 5 years your renewal premiums or the premiums at the end of 5 years were the same as somebody at that age who bought a new policy and took a medical exam. So you’d be 30 years old, you’d buy a 5 year term at cheap rates, and at 35 without taking a medical exam if you kept the policy you’d get the same premiums as someone who’s 35 who bought a brand new policy and took a medical exam. So you didn’t take a medical exam, you got the same prices as somebody that did.

American policies didn’t work this way. They had cheaper term premiums upfront but at renewal the pricing was based upon the idea that you hadn’t taken a medical exam recently so we don’t know what your health looks like so therefore the renewal premiums were much higher.

The result of this was that Canadian policies were a little more expensive upfront but cheaper later. American policies were way more expensive later but a little bit cheaper now.

Now the result of that was, you remember those computer shopping systems we were talking about, the American policies were showing up top in all those shopping systems. Agents were running those multi-company quotes, the American companies were all coming up top.

The result of that was two things. One, Canadian companies shifted over the 80’s and 90’s, they shifted from their initial structure over to an American style of term life insurance policies where renewal premiums are much higher than they were.

The second thing this did was, the impact of that was, it effectively killed 5 year term. Because what you used to do was buy a 5 year term and every 5 years you got really good rates. Why would you pay the higher premiums on a twenty year term when 5 year term was cheaper and you had great renewals.

So what it meant was, 5 year term really went by the wayside and longer terms such as 10, 15, 20 and even 30 year term now very much became the standard. So 5 year term is only rarely available on the marketplace now whereas back in the 80’s and 90’s it was a very popular type of term life insurance policy.

1990-2009
1990’s – Welcomes Term to 100
And now we’re into the 1990’s.
Something happened in the 1990’s – a new type of term insurance. Now this is actually arguable, some people call it term, some people call it permanent it was basically a blend of both term and permanent called Term to 100.

Term to 100 was like term insurance in that there was no cash values. It was like permanent insurance in the sense that premiums weren’t level for 10,20 or 30 years, they were level for life. It was kind of a blend of both.

Unfortunately, or I guess perhaps fortunately, the policies were priced incorrectly. They used something called lapse supported pricing. That’s outside the scope of this video as to what that actually is.

Needless to say, it was priced too cheaply which is good for consumers because they bought a ton of it

but the prices simply weren’t sustainable. So eventually over time the prices on term to 100 premiums went up and it became much less of a bargain.

2000’s The Internet and consumer price comparisons online
Now, lets move forward to the early 2000’s. By the early 2000’s now we’ve got a new factor in play – the internet.

Around about that time, late 90’s early 2000’s, people were going online, they had PC’s at home and they had access to the internet. And I actually put online the first Canadian multi-company quoting system on the internet for consumers. That quickly went viral, a lot of websites started offering that kind of stuff, it’s littered all over the internet today. You can go online almost anywhere and shop out prices.

And the impact of that in my opinion is because it let consumers now shop prices on their own at their leisure, it really drove competitive pricing from what we used to have was large variances in term pricing down to the point today where we have difference in prices from amongst the top 10 companies that are almost inconsequential. I know everyone’s shopping on price but if you look at the cheapest company and the fifth cheapest company in Canada it’ll be very few dollars difference in prices. And that’s again I believe because early 2000 when these online shopping systems went online.

2008-2009, the Financial Crisis and the Death of Term to 100
Now lets fast forward now to 2008-2009. You may recall the financial crisis. The financial crisis destroyed a lot of things in the financial world. One of the things it hammered was long term bond rates. Now life insurance companies count on things conservative, interest yielding investments like 40 year bonds to save for over the long term, for these long term life insurance policies. And interest rates, after the 2008-2009 financial crisis brought 40 year bond rates to almost zero so life insurance couldn’t earn interest.

The result of that was the death of term to 100 life insurance policies in Canada. Not too many years after the 2008-2009 financial crisis, a few life insurance companies started to leap frog over each other raising prices on term 100 and eventually almost every life insurance company in Canada simply withdrew from the marketplace. So that’s what we have today is still out there, you’ll hear it in literature and stuff like that, but in the marketplace there’s few if any viable term 100 life insurance policies left in Canada.

2008-today
Today – Turmoil in the marketplace
Fast forward now to today.

To at the time of this video 2002, also encompassing the last year or two. A couple things have changed. The Canadian term marketplace, perhaps despite appearances, in my opinion is actually in turmoil.

Covid gets rid of blood and urine tests on applications, and what is a medical exam?
There’s a couple reasons for this. The first is covid. When covid struck, or pre-covid, life insurance companies when you did an insurance application would send a paramedical person out to your home to do a medical questionnaire and then they’d do a blood and urine test. And with covid of course you can’t be going to people’s homes and drawing blood and urine. So what life insurance companies did was they transitioned to a medical interview either through a form or a questionnaire or often a telephone interview. And because they no longer have access to blood and urine if necessary, if they need additional information they just reach out to your doctor and get a report. So medical exams changed from being an in-person blood urine plus a questionnaire, to really just a questionnaire either through a form or a telephone interview. That was the first thing that changed.

The second thing that changed was the rise of companies similar to The Term Guy who are selling term life insurance directly to consumers online, there’s no more direct agent involvement.

But there’s a bit of a discrepancy or disagreement on how to market that.

When Canadian consumers are going online looking for term life insurance, they want a variety of things. They want the cheapest prices of course. They want instant access to their policy, they want to click a button and be insured immediately, and they don’t want any medical exam.

So now we have a situation where you can’t actually have all three of those things. You can’t have cheap rates, no medical information, and instant issue of policies. Somethings got to break. Because you don’t, you’ve got people who are on death’s doorstep getting the same life insurance policies as professional athletes and clearly that doesn’t work.

So what breaks?

So what companies are doing, is they’re billing these telephone interviews or forms where they conduct medical history, as no medical exam. Is it? There’s disagreement on that, you can make your own choices as to whether you think that’s a medical exam.

In fact, let me give you an example. Here’s an online life insurance company called Mosaic life. This is out of their FAQ.

It says:

Will I need to complete a medical exam or provide bodily fluids as part of my application?

And the answer is this:

For most people, no. Unlike other life insurers we do not typically require you to provide blood and urine samples to complete a medical exam. Instead we base our decision on our online questionnaire which for most people takes under 10 minutes to complete.

Well, curiously, that is actually exactly like most life insurance companies particularly term life insurance companies. You are just either completing a form or doing a telephone interview and there’s no blood or urine. This company’s billing that, like others as a no medical exam.

So we’ve not got a bit of a marketing strategy where people are looking to promote life insurance applications online as no medical exam, when in fact there is a medical questionnaire. And it’s exactly what consumers want. Or you have other companies, and certainly The Term Guy’s an example of this, where we don’t bill that out to consumers or market it as a no medical exam policy.

So what breaks? We’ve got consumers demanding three things, they can’t have all three things. SO the first thing as I mentioned is, it’s now being billed as no medical exam insurance. It’s arguable if that’s the case. Perhaps it is, perhaps it’s not. It depends on your definition of a medical exam.

Today – chopping policy features, including renewable and convertible
But the second thing that’s happening is to be able to provide some version of those three things that consumers are looking for, is that policy features are now being chopped.

So, a number of online term life insurance policies have been released to the Canadian marketplace where they’re chopping a variety of features. Some of them are actually increasing premiums but not all of them are. And the way to do that is, they chop the renewable and convertible part. So we’re now seeing the rise of term life insurance policies that are no longer renewable and no longer convertible. And if you recall we had people going back over 100 years emphasizing the importance of renewable and convertible. We had it again in the 1980’s when consumer advocate David Chilton came out and stated in his very popular book The Wealthy Barber that in fact you needed to purchase renewable and convertible term policies. And today, we now have consumer advocates such as Preet Banerjee, who’s recently released a video talking about exactly this. He’s got a video you can look it up on Youtube if you search Preet Banerjee renewable term where he spends 5 or 10 minutes telling consumers how important it is to make sure that your online term life insurance policy is in fact convertible and renewable. So he talks about that in a lot more depth than we’re going to go into today.

So, where are we at today?What we have is a marketplace that’s a bit in turmoil. We’ve got a number of different marketing companies trying to address consumers needs some of them are billing their policies as no medical policies, some of them are dropping the renewable and convertible features. Where do we end up in the future? I think it’s really going to depend on how consumers feel about the importance of renewable and convertible term and unfortunately the importance of those features isn’t something that consumers see when they purchase their policy. It’s something you don’t see typically until the end of your renewal period which often is 10, 20 or 30 years. So consumers won’t recognize this for probably a decade or two in the future, about whether they actually care or not about renewable and convertible term.

So again, that’s the complete history of term life insurance in Canada. My name is Glenn Cooke, I’m The Term Guy.

Resources

First Lecture on Insurances, James Dodson, 1756

Modern Business, Volume 18 Insurance. Edward R. Hardy, Solomon S. Huebner, G.F. Michelbacher and Bruce D. Mudgett, (C) 1919 by Alexander Hamilton Institute.

Principles of Insurance, Volume I: Life. W.F. Gephart, Professor of Economics in Washington University. (C) 1917 The Macmillan Company.

Insurance at Piney Woods, Samuel H. Davis. (C) 1896 The Insurance Herald Co.

Life Insurance Manual, 12th Edition. A.J. Flitcraft (C) 1899.

The Wealthy Barber, David Chilton(C) 1991 By David Chilton.

Preet Banerjee video on Renewable Term; https://www.youtube.com/watch?v=LoPALv2iCoU

Image Resources

James Dodson

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Pre-industrial revolution

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post-industrial revolution

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Transamerica Life

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A.L. Williams

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David Chilton

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Internet

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Preet Banarjee

https://governingcouncil.utoronto.ca/sites/default/files/styles/member_images/public/biography-images/DSC_8071-Edit.jpg?h=aaf06e8f&itok=wJ4K5rhW