Now, consider Table 2. This table takes the values from Table 1 and shows the annual effective investment return on the $100,000 single premium.
Based on values shown in the tables, it may be a difficult decision between purchasing the life insurance or the deferred annuity. The deferred annuity has higher surrender values through about year 15, but after this, the life insurance surrender values are higher. (Assuming expected mortality for insureds in excellent health, the life expectancy for our insured is about 24 years.)
If the insured has no intention of ever taking cash out of the policy, the life insurance option is clearly the better choicesince the life insurance death benefits always exceed the annuity surrender values.
If the insured wants access to the policy values through partial withdrawals, however, the better choice depends on the time frame of expected withdrawals. If the insured believes cash withdrawals are likely in the contracts early years, the deferred annuity is the better choice; otherwise, the life insurance contract is the better choice.
The above example assumes that our 65-year-old male was in excellent condition. But what if the insurance company gives him a Table 6 rating, however? Does this change our conclusions? Lets look at Tables 3 and 4 to help find an answer. (The tables show a comparison of values assuming a male issue age 65 nonsmoker, rated Table 6.)
As in the previous example, the second tablein this case, Table 4takes the values in the first tableTable 3to show the annual effective investment return on the policyholders $100,000 single premium.
A review of the tables shows that the life insurance surrender values did not decrease significantly between the standard and substandard insureds. This is primarily because the death benefit is much less for the substandard insured. The annuity values remained the same between the charts as expected.
After reviewing the table for the substandard insured, the conclusions are similar to those for the standard insured. That is, if the substandard insured is planning to hold the life insurance until death, the better option is to purchase life insurance rather than the annuity.
But if that insured is likely to surrender the policy for the cash value, then the deferred annuity may be the better option through the 20th duration. Since the life expectancy is about 18 years for this insured, the annuity surrender value is greater than the life insurance surrender value during the insureds entire expected lifetime.
Based on the simple comparisons above, single premium insurance cannot be ignored as a conservative investment option and often provides a better return than deferred annuities, even when the health of the insured is less than excellent.
Kent C. Scheiwe, FSA, MAAA, is a principal in the Indianapolis office of the Milliman USA actuarial consulting firm. His e-mail is [email protected]
Reproduced from National Underwriter Edition, April 16, 2004. Copyright 2004 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.