Endowment plans have been a popular investment and insurance product in Canada for decades. They provide a unique combination of life insurance coverage and a savings component that can help build up a cash value over time. As we approach the mid-point of 2024, let's take a look at the current endowment plans in Canada.

 

What Are Endowment Plans?

An endowment plan is essentially a life insurance policy that also serves as an investment vehicle. When you purchase an endowment plan, you agree to pay premiums over a specific term, usually 10-25 years. A portion of each premium payment goes towards the life insurance coverage, while the remaining amount is invested by the insurance company.

 

The cash value component of the endowment plan grows tax-deferred over the term. At the end of the term, you receive the full cash value amount as a lump-sum payment, regardless of whether you are still living. If you pass away during the term, your beneficiaries receive the full face value death benefit from the life insurance portion.

 

Endowment Plans Remain Popular

Despite increasing competition from other investment products like mutual funds and segregated funds, endowment plans continue to be a major part of the Canadian insurance market in 2024. The latest data from the Canadian Life and Health Insurance Association (CLHIA) shows that new endowment premiums written in 2022 totaled $2.4 billion across the industry.

 

The top writers of new endowment premiums in 2022 were:

 

1. Manulife Financial - $521 million 

2. Sun Life Financial - $476 million

3. Industrial Alliance - $323 million  

4. BMO Insurance - $301 million

5. Canada Life - $274 million

 

These five insurers accounted for over 75% of the total new endowment premium sales last year.

 

Growth in Cash Value Accumulation

One of the key benefits of endowment plans is the ability to gradually accumulate a substantial cash value over the policy term from the invested portion of premiums. Thanks to several years of strong market returns, existing policyholders have seen sizable growth in their plan values.

 

The CLHIA reports that as of December 31, 2022, the total cash value for in-force endowment policies in Canada exceeded $77 billion. This represents an increase of over 8% compared to the end of 2021 when cash values totaled $71.2 billion.

 

"Endowment plan cash values have really taken off recently due to the performance of the underlying investments," said Amy Chadwick, a life insurance analyst at EBN Financial. "With interest rates rising, we may start to see a shift back towards products like GICs and annuities, but endowments will likely remain an important part of many Canadian portfolios."

 

Tax Advantages Remain Attractive

Part of the continuing appeal of endowment plans is the preferential tax treatment they receive in Canada. Any interest, dividends or capital gains generated within the plan's investments are allowed to accumulate tax-deferred until the final cash payment is made.

 

Upon the plan's maturity, only the gain above the total premiums paid is taxable to the policyholder at their marginal rate. For those in higher tax brackets, this can result in significant tax savings compared to annually paying taxes on investment income outside a registered plan.

 

New Product Innovations

While the basic structure hasn't changed much, insurance companies have introduced new variations and options for endowment plans over the last few years. In response to consumer demand, many plans now allow for greater investment customization.

 

"Traditionally, the insurance company would invest the cash value component quite conservatively in their own bond and mortgage funds," said Dani Rogers, an advisor with IG Wealth Management.

 

Some insurers are also innovating with combined endowment plans that provide both life and critical illness insurance coverage. These "hybrid" plans can make the life insurance portion more affordable and straightforward for families.

 

Other innovations include offering income payout streams instead of a lump-sum at maturity, indexed premium payment schedules, and plan options that allow for intermittent premium holidays.

 

Regulation and Oversight

As with other life insurance products, endowment plans are regulated at the provincial level in Canada. Insurance companies must be licensed by provincial regulators and follow strict guidelines around disclosure, marketing practices, financial reserves and more.

 

In recent years, there has been an increased regulatory focus on endowment plans specifically. In 2021, the Canadian Council of Insurance Regulators issued new guidance aimed at standardizing risk disclosure and surrender value calculations.

 

There have also been a few high-profile disciplinary actions related to deceptive sales tactics by some agents when selling endowment plans. Regulators are working to enhance oversight and enforcement to protect consumers.

 

The Future of Endowment Plans

Looking ahead, endowment plans are expected to remain a going concern in the Canadian insurance market. However, their overall popularity may start to wane somewhat as interest rates and client preferences continue to evolve.

 

"I think we'll see modest growth for endowment plans over the next few years, but that growth will likely start to decelerate," projected Paul Bourque, President and CEO of the Investment Funds Institute of Canada. "As rates rise and other income products look more attractive, endowments may get a smaller share of wallet for new investment dollars."

 

Additionally, new linked-investment life insurance products like universal life policies with indexed accounts are starting to gain more traction as alternatives to endowments. Their increased flexibility may appeal to certain investors.

 

At the end of the day, endowment plans remain a unique product that can serve specific investment, insurance and tax planning needs for Canadian consumers. Their strong cash values and guaranteed life insurance makes them appealing as a conservative way to gradually build up an estate over a long term. While facing increased competition, endowments are likely to stick around as a core product offering for Canadian life insurers.

 

You can also check the information regarding Term Life Insurance in Canada

 

FAQs:

1. What is an endowment plan?

An endowment plan is a life insurance policy that also serves as an investment/savings vehicle. Part of the premiums go towards life insurance coverage, while the rest is invested by the insurance company to build up a cash value over time.

 

2. How does the cash value accumulate?

The portion of premiums allocated to savings/investment is invested by the insurance company, usually in fixed income investments like bonds and mortgages. The cash value grows tax-deferred over the endowment term, which is typically 10-25 years.

 

3. What happens at the end of the endowment term?

At maturity, the policyholder receives the full accumulated cash value as a lump sum payment, regardless of whether they are still living. If the policyholder passes away during the term, their beneficiary receives the full face value death benefit.

 

4. How is the cash value taxed?

The interest, dividends and capital gains earned within the policy accumulate tax-deferred. Upon receiving the final cash payment, the policyholder only pays tax on the gain above their total premiums paid at their marginal rate.

 

5. Can you access the cash value early?

Most endowment plans allow you to access the cash value through loans or surrendering the policy early, subject to surrender charges. However, this defeats the purpose of letting it accumulate tax-deferred over the full term.

 

6. What are typical rates of return?

Actual returns can vary, but many endowment plans target around 4-6% annual growth on the cash value component after fees.

 

7. Can you choose your own investments?

Traditionally the insurance company selected conservative investments, but some endowment plans now offer options to customize with segregated funds or mutual funds.

 

8. Are endowment plans still popular?

Yes, Canadian insurers wrote over $2.4 billion in new endowment premiums in 2022. However, growth has slowed somewhat compared to past decades.

 

9. What are the key benefits?

Tax-deferred growth, guaranteed life insurance coverage, ability to build up an estate/cash value over time in a conservative manner.

 

10. What are the main drawbacks?

Rigid structure with penalties for early withdrawals, typically conservative investment options, managing life insurance and investment in one contract.