Full Disclosures Whole Life Insurance Report

While its true that the number of insurers selling participating whole life gets slightly fewer every year, the big and not so big mainly mutual companies selling it are pulling in sizeableand even better for themincreasing premiums. Absent from this years report are Canada Life, which discontinued individual life operations in the U.S., and Sun Life of Canada, which will be completely out of the market this year.

The big picture for whole life couldnt be better as sales ramped up with a 13% increase from 2001 to 2002. According to LIMRA, this is the first double-digit percentage increase for a year since 1990. We believe the jump in 2003 will be even stronger overall with many companies setting sales records.

Adding luster to whole life are sales in the 412(i) Defined Benefit Pension Plan market where return of premium is required. Until universal life designs that can accommodate returns are more widespread, “dividends are the way to go” as one of our company contacts states. Guardian recently introduced a product directly aimed at this market, and other companies like New York Life are marketing to the retirement needs of small-business owners and their employees while stressing that a plan using whole life is “free of market risk.”

Of course, the product market share could revert to what it was 4 years ago when universal, and particularly, variable products had the sales momentum. For now, perception of equity risk is still high among consumers of variable products and UL crediting rates are still depressed. Insurers are fighting back with flexible premium policies that are usually less expensive and adding guarantees of premium and death benefit. In many minds whole life remains the safe bet if the last place you want risk is in your life insurance strategy.

The data in the charts (see pages 34 and 35) is pulled from a comprehensive database compiled annually by the editors of Full Disclosure. Nineteen participating (dividend-paying) contracts are featured on an illustrated basis with 11 reporting actual results. This compares with 20 projections last year with 13 historical samples. All data is current as of Feb. 1, 2004, a date by which many insurers declared their current dividend scales for the year. Companies that have a later dividend scale revision were asked to illustrate values based on the upcoming dividend scale.

By using these tables you can get an idea of how policies currently are 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.

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 an all base policy, but the upside to the consumerand the selleris a more affordable premium.

The internal rate of return method is applied to both prospective and 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. It is a good way to measure policies that have dissimilar annual premiums, but its downside is that it favors policies with large premiums due to economies of scale.

We look at whole life historical performance in 2 ways. 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.

In real sales, policies usually are 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 again we can use IRR measurements on these values. Compiling these historical figures is a time-consuming exercise for the companies in this section, and we are grateful for their efforts.

The real product differentiation is at the policy level in the features, limitations, and current and guaranteed cost structure of each. In that spirit, we champion the fact that policies are designed to accomplish certain objectives. And while these illustrations and histories are helpful, a comprehensive analysis using data such as that found in Full Disclosures software database is the best way to benchmark policies.


Reproduced from National Underwriter Edition, May 14, 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.