Do you illustrate loans and withdrawals on your participating whole life insurance illustrations? Is it necessary? Is it good for your business? Is it good for your client?

At a recent industry meeting, I met some financial representatives who have made personal choices not to illustrate loans and withdrawals on participating whole life, even though their companies facilitate this functionality in their illustration software.

Why? These reps said it is too easy for clients to get a certain number (like illustrated “retirement income”) into their heads and not grasp the non-guaranteed nature of it. After all, the only illustrated guarantee the industry can make to customers is the left side (guaranteed values) of the illustration’s tabular detail. The best that can be said about the right side (current values) is that it accumulates values as if today’s dividend scale didn’t change for the life of the policy.

Still, it was surprising to hear that reps are not illustrating the loan and withdrawal options. After all, part of the flexibility of owning participating WL is the opportunity to accumulate dividends as paid-up additions inside the WL and surrender them for value later on. (As an aside, it’s impressive to know these reps were successful despite not using this tool.)

This got me to thinking about how one could show the flexibility of utilizing accumulated values inside a par WL at point of sale–without creating future problems if actual contract performance falls short of illustrated projections.

Let’s look at it by asking: From a sales perspective, is it reasonable to show a range of dividend payment possibilities (percent of current scale) and still have a good story to tell?

To answer this, assume the following hypothetical case: Male, standard non-tobacco user, issue age 45, pays $12,000 annualized in monthly premium for a full-pay par WL (though the intention is to pay only 20 years out of pocket). The face amount is $619,619.

The work-through is shown in Table I, using a generic par WL product. It assumes a withdrawal-to-basis/loan scenario that would roughly cover the premium and provide an extra $12,000 per year in income starting at the 21st policy year. It leaves just enough death benefit to cover the policy loan and final expenses in all policy years to age 100. This is accomplished using 100% of the current illustrated dividend scale in all future years. Table I also shows the same calculation, using smaller percentages of current dividend scale in all years. (Note: Each reduced dividend scale scenario results in less than $12,000 of net income to the policyholder.)

Each scenario maximizes the withdrawal-to-basis/loan capability of the contract starting in the 21st policy year. In each case, however, if the dividend scale is less than assumed (90% of current scale instead of 100%, for instance) and if the policyholder does not actively manage the withdrawals/loans, then thousands of dollars in policy loan interest could be due in the late policy years to avert a lapse. A lapsed contract would result in the policy owner needing to pay income tax on all value taken from the contract in excess of basis.

Now, consider Table II. This is a different tack, using the same par WL. It shows what face and premium level could have been illustrated at issue to support a cash flow that nets roughly an equal amount ($12,800) to the policyholder. Several points can help clients understand this:

o The supportable cash flow from each policy is sensitive to projected dividend scales.

o The prospect of large policy loan interest costs late in the contract could be disastrous if the loan interest can’t be paid and the policy lapses, resulting in a tax bill on all value taken from the contract in excess of basis.

o The different funding scenarios in the second line of Table II underscore the possibility of protecting clients against relying on the current dividend scale to fund a sales scenario.

The last point above is key. If the agent can sell an extra $100 of premium a month under the 90% of scale scenario, that can provide the client some opportunity for extra value–provided that the current dividend scale is maintained. It also can provide some protection against failure to meet the client’s accumulation goals in a slightly falling dividend scale environment. Even the 70% of scale scenario, although it requires 50% more premium, has advantages of more death benefit and significant opportunity for extra value if something higher than the 70% of current scale threshold is maintained.

There is no right or wrong answer here, only shades of each. Once the insurer has set boundaries for allowable illustrations, it is up to the agent to decide what sales scenarios make sense. If the decision is to illustrate loans and withdrawals, it might be good protection for both client and agent to avoid illustrating a minimally funded, maximum-dividend-paying scenario.

Robert P. Stone, FSA, MAAA, is assistant vice president-individual product development at OneAmerica Financial Partners in Indianapolis. His e-mail address is Rob.Stone@OneAmerica.com.

It was surprising to hear of reps not illustrating the life policy loan and withdrawal options