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Life Health > Life Insurance

Full Disclosure Whole Life Report

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The data in this report is pulled from a comprehensive database compiled annually by the editors of Full Disclosure. Twenty-four participating (dividend-paying) contracts are featured on an illustrated basis with 14 reporting actual results. This compares with 19 projections last year with 11 historical samples.

All data is current as of Feb. 1, 2006, 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.

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 412(i) 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 412(i) plan, but it is simple, retirement benefits are guaranteed and death benefits are made available (subject to limitations on amount and taxability).

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 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 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 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 index is better, but be aware of how much premium each policy commands annually.

In real sales, 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 policyholder value. Here again we can use IRR measurements on these values.

This year’s 20-year historical analysis comes at a time when companies currently are implementing the latest 2001 mortality tables. Twenty years ago companies were also implementing new tables. In 1986, companies began to introduce policies using the 1980 CSO mortality table for calculations. During a transition period ending in 1987, many companies sold both 1958 and 1980 CSO-based products. It is interesting to see how adopting a new table changes policies’ performance. Policy performance and the interest-adjusted net cost and payment indices included in the chart may be affected, and some companies in this study show both products. In the 20-year chart, we have indicated with asterisks next to the policy name which pricing method was used in each policy when it was issued on Dec. 31, 1986.


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