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Life Health > Life Insurance

Full Disclosure Whole Life Report

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This report features charts and information on 28 participating (dividend-paying) contracts. The 4 parts of this excerpt are from the newest whole life edition of the Full Disclosure software series. As in past reports, there are sections covering current and guaranteed illustrated values, the industry’s only actual historical performance analysis, and a narrative detailing what each policy’s fundamental design objectives are.

This year we have added a new scenario featuring maximum income generation, similar to that we show for universal and variable life products. The parameters of this new section basically feature a policy that is heavily funded and switches to a paid-up dividend option at retirement age, thereby producing a maximum income stream.

Trends we are seeing in the whole life market include the rapid adoption of products that utilize the new 2001 mortality table and products designed for niche markets. Of the currently illustrated policies, 18 are priced using the new table, an increase from only 7 last year. This is as the survey gained a policy from the previous excerpt and one company, USAA Life, withdrew from the market. This pricing migration is important in that it allows insurers to lower annual premiums and/or increase illustrated performance relative to those utilizing the 1980 table with higher costs and shorter maximum age.

Meanwhile, niche products include those with high early cash values and those that are entirely guaranteed non-participating plans. These policies must represent the ultimate in safety.

All data is current as of Feb. 1, 2008, a period by which many insurers have declared their current dividend scales for the year. Current illustrated values are based on a $250,000 policy for a male age 40. 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 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 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, 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 versus how they were initially illustrated. An index with a lower number is better, but be aware 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.


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