Truth In Life Insurance

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.