Each year Full Disclosure surveys leading companies active in the whole life insurance marketplace. All data is current as of February 1, 2010, a period by which most insurers have declared their current dividend scales for the year.
This report features 29 policies, two more than last year. All of them are participating (dividend-paying), with the exception of a few guaranteed policies (see footnotes for details). Sections of this excerpt from our study cover current and guaranteed illustrated values, the industry’s only actual historical performance analysis, policy retirement income illustrations, and a narrative detailing what each policy’s fundamental design objectives are.
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 issued policies. 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. It can also provide a level of flexibility for further paid-up additions if required.
The internal rate of return 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 fall. 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, such as whole life, but its downside is that it favors policies with large premiums due to economies of scale. Pay careful attention to the footnotes for this section, because not all policies are participating nor do they all have a long premium paying period.
The historical performance charts are based upon a male, age 45 (we chose age 55 for the last whole life excerpt) who purchased a participating policy 10 or 20 years ago. We look at the illustrated and actual performance two ways. The first 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. A lower number index is better, but beware of how much premium each policy commands annually, because policies with higher premiums tend to have better performance.
In reality, policies are usually not illustrated with cash dividends being paid to the policyholder, but rather 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 use IRR measurements on these values to accommodate both the additional paid-up amounts as well as dissimilar premiums between policies.
The new retirement income section features a policy that is heavily funded ($10,000 annually) and that switches to a paid-up dividend option at retirement age, thereby producing a maximum income stream. Twenty-five premiums are made by a 40-year-old insured until age 65. A maximum income stream from that age is paid for 20 years through the insured’s 84th year. A low residual value is calculated at age 100.
This list is shorter than that for current values because some companies cannot illustrate to Full Disclosure’s specifications, and other policies are not meant for retirement income. Retirement income is a great use for whole life and is considered more often these days, given equity and other subaccount volatility.
Whole life is a pretty straightforward product, but there are policies in this excerpt that are meant to serve niche marketplace needs (high early cash values, for example). To help clarify what each product in this report is designed to do best, we have included information under the Product Design section. Much more information is available in the Full Disclosure tables.