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Full Disclosures Whole Life Report

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When contrasting the number of companies selling whole life with those selling variable or universal life, it seems like a pretty small universe. This year’s whole life excerpt from the Full Disclosure software series features 23 policies. This is an increase from 19 at last year’s review.

Our participating companies are reporting that sales remain strong and the outlook remains mostly positive as agents can make their case for stability vs. volatility in personal life insurance portfolios, and new uses for an old product continue to be found.

As we mentioned in our analysis last year (see NU, May 17, 2004), whole life is a great product for 412(i) benefit plans.The 412(i) plan (or fully insured retirement plan) is a defined benefit plan that allows tax-deductible contributions. The plan is funded with life insurance, or a combination of life insurance and annuity products, as required by the IRS. It is ideal for small business owners who are an S or C Corporation, partnership, sole proprietor, or an LLC. It also requires a return of premium, which whole life does and many newer universal life plans can as well. Whole life is very popular for these plans because the pitch to business owners is that whole life is “free of market risk.” It is not an entirely true statement, but you get the idea.

Somewhat problematic for whole life sellers, at least when and if new reserving regulations are adopted, is the lure of universal life products with guaranteed premiums for life or at least to age 100. This guaranteed premium territory was formerly the sole province of whole life, but UL, if administered properly, can do it for less premium, albeit with no cash values at the end of the contract period. Short-term interest rates are looking up, which is good news for UL current crediting rates. Variable life sales continue to be more difficult as equity markets once again are declining, but much of the public is aware of the risk and hopes to benefit from the inevitable investment upside. Given the dynamics of today’s marketplace, we envision the sales status quo pretty much continuing as it has.

The data you see here is pulled from a comprehensive database compiled annually by the editors of Full Disclosure. Twenty-three participating (dividend-paying) contracts are featured on an illustrated basis with 13 reporting actual results. This compares with 19 projections last year with 11 historical samples. All data is current as of Feb. 1, 2005, a period by which many insurers have 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 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 consumer–and the seller–is 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 rises over time, as the IRR for the death benefit falls. 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 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 two 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 beware 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.


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