Full Disclosure’s Participating Whole Life Report

Not for any lack of irony, premium volume for participating whole life continues to climb, while the number of companies selling it continues to shrink. Demutualization and the overall trend towards variable life over the last few years have dictated product development even as customers seek the safety and guarantees associated with dividend paying participating products.

At a recent industry conference I attended nearly every company still selling whole life was enthusiastic about their sales results in light of continued struggles in equity sectors. Others, out of the whole life market, were focusing on secondary guarantees on premiums and death benefits–hallmarks of whole life–that are becoming increasingly popular in universal and variable product types.

There are three parts to this report excerpted from the latest edition of Full Disclosure. Charts contain current illustrated values and historical performance on a dividends-to-paid-up-additions (PUA) basis.

Another section covers strengths attributable to each plan as outlined by the companies reporting their whole life information. Current values cover policies on the street today, while the histories review the historical performance on leading plans of 10 and 20 years ago. Twenty-one contracts are covered on a current basis with nine reporting actual results.

All data is current as of Feb. 1, 2002, by which date many insurers declared their dividend scales for 2002.

Illustrated values are based on a Male Age 40 paying on a $250,000 policy. The class specified is best nonsmoker as long as the class represents at least 15% of the contract issued of each policy. Illustrations are divided between all base (100% whole life coverage) and policies blended with 50% term. Blending policies in this fashion allows a lower premium outlay while retaining a responsible level of all base coverage to cushion any adverse changes in dividend scales. There is more risk to the level death benefit and premiums that are guaranteed in all base policies, but the upside is a more affordable premium.

We use the internal rate of return method to examine prospective as well as historical performance. The IRR is applied to current cash values and death benefits measured at a policy duration of 30 years.

IRR figures in the early years of a policy would be negative until sufficient policy values existed. This gives the impression that the policyholder is “losing money,” which isnt exactly true because he is paying in the meantime for something for which a benefit is derived: the death benefit.

Conversely, the IRR of the death benefit in the early years of a policy is very high because of the few premiums paid. The IRR of cash values rise over time, as the IRR for the death benefit fall.

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.

The downside of IRR is that it favors policies with large premiums, due to economies of scale. The upside (unlike the interest-adjusted method) is that everyone understands how it works, and it can be easily used on a dividends-to-additions basis.

In addition to collecting the historical performance of cash dividends, we asked insurers to provide policy histories with dividends to paid-up additions causing increasing death benefits and higher cash values than dividends taken as cash. We have included the interest-adjusted indices mentioned earlier on the cash dividend histories, and used internal rate of return measurements on the values based on dividends to PUAs.

It is a time-consuming exercise for the companies that provided these figures, and we are grateful for their efforts.

A comprehensive approach can lead you to the true nature and architecture of the contract. We recommend a 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 may be designed for the substandard market.

Remember, the data in this report is a small portion of Full Disclosures overall analysis. Use it as an efficient snapshot of how policies are (or have) illustrated, and use a broader review built on the economy and quality of individual attributes that are often not apparent through any illustration.


Reproduced from National Underwriter Life & Health/Financial Services Edition, June 3, 2002. Copyright 2002 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.