Full Disclosures Whole Life Report

This report features the leading whole life companies active in mid- to upper markets, with information pulled from an annual database compiled by the editors of Full Disclosure. By using these tables one can get an idea of how policies are currently being illustrated, as well as how leading plans issued by many of these insurers 10 and 20 years ago have returned value to policyholders historically.

As for the market, the number of companies selling whole life is holding steady after some insurers purged the product from their portfolios during demutualization and a simultaneous move to variable products. As we have mentioned in this column previously, those that still sell whole life–or even more, make it a pillar of their overall product portfolio–are enjoying strong sales growth.

Demutualization is past for now, but consumer perception of equity risk remains very high. A lifetime cash value whole life plan will, at the very least (at the guaranteed level), provide no surprises when it comes to premium, death benefit and cash value.

Another product enjoying renewed popularity (even in light of lowered interest crediting rates) is universal life structured with second-generation guarantees of premium and death benefit. These guarantees can, if certain conditions are met, guarantee the premium and death benefit at a usually lower cost than whole life. (See NU, March 31, 2003, for Full Disclosures most recent UL survey.)

Twenty participating (dividend-paying) contracts are featured on an illustrated basis with 13 reporting actual results. This compares with 21 projections last year with nine historical samples. All data are current as of Feb. 1, 2003, by which date many insurers declared their dividend scales for 2003.

Companies that have a later dividend scale revision, such as Sun Life (on April 1) were asked to illustrate values based on the upcoming dividend scale.

Additions to this report include Sun Life and Manulife Financial, which was inadvertently left out last year. General American Life and New England Financial declined to participate this year, with the parent company MetLifes product represented instead.

There are three parts to this report excerpted from the latest edition of Full Disclosure. Charts contain current illustrated values and historical performance. A section also covers strengths attributable to each plan as outlined by the companies reporting their whole life information.

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.

This section includes Lafayette Lifes graded premium whole life plan that is marketed in the whole life/term blend marketplace. It is not a true participating whole life policy and only appears in the table featuring blended illustrations.

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 duration of 30 years. 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.

We look at whole life historical performance through two lenses. The first basis shows policy dividends measured as cash out of the policy. Here the interest adjusted payment and cost indices are applied on the actual performance of the policy and on the cash values illustrated 10 and 20 years ago. The indices show how plans with dissimilar premiums actually performed vs. how they were initially illustrated. A lower number is better, but be aware of how much premium each policy commands annually.

Policies are usually not illustrated with cash dividends being paid to the policyholder but with dividends going to Paid-Up Additions, little slices of whole life that, in turn, develop their own dividends, thus enhancing policyholder value. Here we are able to use IRR measurements on the values as they more closely represent a traditional experience. Compiling these figures is a time-consuming exercise for the companies in this section, and we are grateful for their efforts.

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 are a small portion of Full Disclosures overall analysis. Use it as an efficient snapshot of how policies are (or have been) 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 Edition, May 5, 2003. Copyright 2003 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.