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Full Disclosure Whole Life Report

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The data in this report is excerpted from a comprehensive database compiled annually by the editors of Full Disclosure. Twenty-seven participating (dividend-paying) contracts are featured on an illustrated basis, with 13 reporting actual results. All data is current as of Feb. 1, 2007, 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, 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.

Of the currently illustrated policies, 11 are priced using the new 2001 mortality table. This migration is important in that it allows insurers to lower annual premiums and/or increase illustrated performance relative to those utilizing the 1980 table. In a competitive environment, the ability to tout high internal rates of return on values and death benefits courtesy of the new table is extremely valuable-even against universal life. It also makes whole life more attractive from an income standpoint. As a result, future whole life excerpts from Full Disclosure will feature retirement income streams from surrender values and loans.

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 consumer–and the seller–is a more affordable premium.

In the illustrated values chart as well as the 10- and 20-year historical excerpt, the internal rate of return method is used. The IRR is applied to current cash values and death benefits measured at 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 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.

The historical performance charts are based upon a Male Age 45 (we used age 55 last year) who purchased a participating policy 10 or 20 years ago. We look at the illustrated and actual performance 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 index is better, but beware of how much premium each policy commands annually. In reality, 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 policy values and death benefits. Here again we can use IRR measurements on these values.

Whole life remains a cornerstone of the life insurance industry, accounting for about a quarter of premium volume. Its inherent stability and guarantees make it a popular choice for the risk averse and for business uses such as defined benefit pension plans. For instance, a life insurance policy under a 412i plan can provide up to half of the plan’s retirement income funding. The guaranteed cash values and premiums of whole life make it an ideal solution for such a plan. Of course, life insurance doesn’t have to be part of a 412i plan, but it is simple, retirement benefits are guaranteed and death benefits are made available (subject to limitations on amount and taxability).


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