Over the years, National Underwriter readers have written to ask a variety of questions about life insurance. It has become clear to me that many are not getting the right information from their sources or enough information to make good business decisions. Sometimes, they’ve been given information that is simplistic, if not downright wrong in many cases.
So, let’s get at some of the truth in life insurance by looking at a couple of questions.
Question: A reader of one recent NU article wrote me with a question concerning an applicant for life insurance who is substandard or rated.
Here’s the question: “Given that paid-up additions on [many] participating policies are issued standard even on a rated or substandard applicant, would it not be actuarially better to issue a participating policy with paid-up additions rather than a traditional Universal Life policy with option B or increasing death benefit? In the UL policy, the amount at risk is always rated, whereas in the participating policy, the risk amount of rated death benefit is being diluted over time with standard issue paid-up additions.”
Answer: Thanks to the reader for asking such a simple question. The answer is anything but, I’m afraid.
UL and traditional policies vary from the get-go by effectively having different target premium (commissionable premium) levels. So, even if the client is paying in the same amount into both policies, I’d suspect the UL with the lower target would have lower expense charges resulting from the need to cover somewhat lower commissions per a same face amount sale.
Thus, potentially more money goes into the UL.
It’s not clear from the question whether the sale is death benefit or accumulation oriented. If it’s the former, then very possibly the par policy has the advantage. There, the person buys additional risk chunks with excess values. In the UL, the person is just adding on cash to the face. One has to examine specific situations, however, to see how the total death benefits differ. In the par plan, there may be less cash resulting from the first observation.
The questioner is right, however, that in a traditional contract, useful ratings dilution occurs because additions are being purchased at standard rates, and dividends on the additions are at standard rates.
The advisor would need to make specific comparisons to determine who wins, and when setting the comparison, it would have to be done on an “apples to apples” basis.
While the comparison is on a standard basis, that doesn’t mean you’d want to do the sale that way. Specifically, UL might confer a real advantage in its ability to pay lower premiums or stop and start premiums.
Any actuary, I think, also would caution on placing too much reliance on illustrations, given the certainty that reality will differ from what is illustrated.
The key is to compare offerings carefully and not rely on generalizations that may not be true.
Question: Are policies that pay commissions always better than policies that don’t?
Answer: We’ll ignore (almost) the obvious observation that commissions help to pay for the services of a professional whose job it is to bring value to the client. But, some comparisons are at least somewhat surprising.
Several insurance companies that purport to have noncommissionable products have pretty expensive offerings.
This is because the services that commissions help fund either have to be provided by the company through an internal support center that can be pretty costly to operate, or they may have to be procured directly by the client at extra cost. Some of the companies with internal sales and support centers are actually inefficient. The time lag between receiving questions and answering them may be too long, or frequently, the level of experience of the support center staff doesn’t approach the sophistication and expertise of the agent whose services are being supplanted.
That’s pretty expensive to me. Even the quantitative comparisons come up short.
My message to advisors can be summed up as follows: Buyer solutions should be tailored to buyer needs. Don’t necessarily assume that one product type is superior to another; it could be, but don’t assume it. And do use illustrations to help analyze relative advantages, but don’t rely on them for expected performance.
Also, don’t hesitate to use professionals, from one’s own company or from companies on the outside, to help analyze given situations. Finally, don’t assume anything–you know what happens to people who do.