Full Disclosure's Whole Life Report

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.