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Full Disclosure's Survivorship Life Report

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If there is a silver lining in the phase-in-phase-out estate tax repeal legislation, and all of the discussions it is provoking in the industry, it is that people are realizing just how versatile a product survivorship life insurance is and that its utility extends into a variety of planning areas. Private split-dollar plans and charitable giving come quickly to mind, and care of a dependent child or parent, and key person coverage, can be added to the list. Flexible riders and designs, such as benefits at the death of the first insured and a “Type C” death benefit option that enhances the benefit, make survivorship even more appealing for these purposes and others.

And, even if the estate tax is fully repealed permanently, the mission of providing liquidity in a family business will still be important. Only about a third of family businesses last through the second generation. There is nothing like cold, hard cash to make a transition succeed!

This report features illustrated values for whole, universal, and variable life survivorship products from the leading companies in the market. And while these are excerpts from the Full Disclosure software series, the report will give you an idea of how these products illustrate in the market, as well as some of their particular strengths in the accompanying text.

Illustrations, of course, are merely tools based on assumptions that can range from conservative to aggressive, depending on the insurer. However, illustrations are the most commonly used hypothetical barometers of how a policy may perform.

Use these illustrated values with caution, for like most things in life, there is most always more to the story.

We use the internal rate of return method applied to current illustrated accumulation values and current death benefits measured at policy durations 30 years dependent on age combination. The IRR of cash values rise over time as the IRR for the death benefits falls. A careful analysis of the IRR measurements indicates which policies are designed (in an illustration at least) to build current cash values, guaranteed cash values, or death benefits.

You will notice at the end of each chart (SVL & SUL), there are columns showing how the policy would have performed under an increasing death benefit option. The cash value of an increasing death benefit policy, while not listed, would be lower because of the added costs of insurance.

The whole life policies have naturally rising death benefits due to the paid-up additions dividend option.

This report features abstracts of 75 universal, whole and variable policies and is excerpted from Full Disclosure featuring Survivorship Life, Volume I edition. Data is current as of May 1, 2001.

Consistency is maintained between all types in age combinations of insureds, product specifications, measurements of sales and death benefits at various points. Flat premium amounts are the same between universal and variable life illustrations, and the variable life illustrations are based on an assumed 10% rate of return net of average fund expenses.

Be aware that not all companies use the same averaging method. Some use a regular arithmetic average and others weight the average according to assets allocated to the various investment options available under each policy. This is only one factor of many that determine how an eventual illustration of values turns out.

With variable products in particular, where the investment experiences vary from client to client, the tangible product differentiation is at the policy level in the features, limitations, and current and guaranteed cost structure of each.

For an accurate comparison we recommend a survivorship life policy analysis approach based on illustrations, current and guaranteed (contractual) costs, features (and their costs), as well as knowledge of what each product was designed to do. While it may be designed with strengths at higher or lower ages or face amounts, a policy may be intended for a purpose/market as remote from illustrations as you can imagine. For example, it may have broad underwriting classes so more policies are issued preferred, or it may be oriented to high guaranteed values or low premium outlays.

Certain companies specialize in “uninsurable” lives, or some other aspect not readily available. A comprehensive approach, such as that used in Full Disclosure, can lead to the true nature and architecture of the contract.

Finally, not only are policies within a certain category (UL, WL, VL) designed to do things differently, but also the mission of each policy type differs from the others. It may seem obvious that whole life is a product designed for different purposes than a variable life policy, but it bears repeating–particularly in a report that contains three different product types.

Obviously, the profile of the insured dictates product suitability. Risk-averse policyholders will find whole life a better fit than someone who looks to market gains to translate into policy cash value growth. Again, use caution when looking to draw comparisons across product types.

Note: The May 21 edition featured a Full Disclosure feature on whole life insurance in which the dividend history figures for New York Life were misstated. The correct 10-year actual payment index figures are 16.08 (WL) and 14.93 (MPWL). The correct 10-year actual surrender cost index figures are 7.14 (WL) and 5.39 (MPWL). The correct 20-year actual payment index figures are 12.65 (WL) and 14.99 (MPWL). The correct 20-year actual surrender cost index figures are .95 (WL) and 2.95 (MPWL).

Reproduced from National Underwriter Life & Health/Financial Services Edition, August 27, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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