True "cost" of whole life insurance

[PrivClientSG]

I didn't want to threadjack the other thread, but in reading some of the responses, I wanted to ask the question...

"Aside from illustrations...what do you look at to compare the true cost of different whole life policies? What ranking or rankings do you look at"

Secondary question -- will you look at "guarantee" only?

Do you look at "traditional net cost?" Now, that includes the dividends -- projected dividends I want to stress -- and that opens up an entirely different discussion. Yes, the illustration is meaningless. Do you look at one of the "adjusted cost" ratings/numbers? Surrender cost rankings? What about taking the opposite approach and using the "equal outlay" numbers? Does anyone do that? What about the "cash/equity accumulation" method?

Do some of you jump outside the policy approach and use one of the more "scientific" approaches? Linton? If you do use this, just for fun -- compare it to the your surrender cost numbers -- because conceptually, Linton is the reverse of a type of surrender cost approach. The latter sets the interest rate and ends up solving for cost; where the former (Linton) sets cost, and solves for interest. It should therefore be an excellent way to check the interest-adjusted method results because the two methods should rank policies virtually identically.

For those of you familiar with Joseph Belth, Ph.D., he has done a lot on policy comparison methods and related life insurance policy issues, topics, etc. Belth has two (I believe he still has two) ranking comparisons that rank/rate policy "costs" in this type of context.

Thanks.

 

[scagnt83]

I didn't want to threadjack the other thread, but in reading some of the responses, I wanted to ask the question...

"Aside from illustrations...what do you look at to compare the true cost of different whole life policies? What ranking or rankings do you look at"

Secondary question -- will you look at "guarantee" only?

Do you look at "traditional net cost?" Now, that includes the dividends -- projected dividends I want to stress -- and that opens up an entirely different discussion. Yes, the illustration is meaningless. Do you look at one of the "adjusted cost" ratings/numbers? Surrender cost rankings? What about taking the opposite approach and using the "equal outlay" numbers? Does anyone do that? What about the "cash/equity accumulation" method?

Do some of you jump outside the policy approach and use one of the more "scientific" approaches? Linton? If you do use this, just for fun -- compare it to the your surrender cost numbers -- because conceptually, Linton is the reverse of a type of surrender cost approach. The latter sets the interest rate and ends up solving for cost; where the former (Linton) sets cost, and solves for interest. It should therefore be an excellent way to check the interest-adjusted method results because the two methods should rank policies virtually identically.

For those of you familiar with Joseph Belth, Ph.D., he has done a lot on policy comparison methods and related life insurance policy issues, topics, etc. Belth has two (I believe he still has two) ranking comparisons that rank/rate policy "costs" in this type of context.

Thanks.

You dont really need to worry about "thread jacking" around here. We go down rabbit holes all the time. Nobody is that formal here or gets offended about side discussions. Some of the best discussions on this forum were a side discussion on a related or unrelated thread topic.

Personally, I do not get that deep into it. You could say I use the cash/equity accumulation method. But when you throw UW into the equation, its hard to do blanket apples to apples comparisons imo. Take Guardian for instance, they treat certain conditions much more favorably than say a NYL or NWM. But it seems you are asking aside from UW.

At the end of the day, the client cares about what they get for their money. That is 2 things:
1. Guaranteed Values
2. Non-Guaranteed Values

And you can approach that from 2 different angles. And I feel the correct way depends on the client and their needs/wants.
1. What you get for the premium they desire/able to pay.
2. What they must pay for the DB they desire/need.

I prefer comparing what you get for a certain premium level.
What does $20k/y for 10 years get you with each carrier?

The internal breakdown of the costs really does not matter to the client (unless they are an engineer...lol). The client wants to know what the best "bang" for their buck is. Maybe I am being a bit short sighted with that, but its worked well for me over the years. And even the most analytical of clients seem to favor that method.

Really that is what all clients want to know "what am I getting for my money"" and "is there a better option for my money?" And that is what us agents are trying to find out when comparing WL carriers.

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But I do feel that guaranteed values are very important to consider. Just look at the whole ON fallout.

I also feel Guaranteed values are indicative, to an extent, of how "rich" a benefit the carrier is willing to give the policyholder long term.

If carrier A guarantees a positive return after 10 years. But carrier B guarantees a positive return after 20 years. It makes you wonder why carrier B is not willing to back up their non-guaranteed projections with a promise that is anywhere close to the projection.

Its like an IUL with a current Cap of 15%, but a guaranteed Cap of 2%; vs. an IUL with a current Cap of 12% and a guaranteed Cap of 5%. If they are able/willing to give a strong promise, in my mind, they are more likely to give greater long term benefits vs. others.

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At the end of the day, all that matters to the client is what they get for their money. Comparing benefits to premium shows them exactly that. (and shows me the agent as well)

 

[DHK]

I like how Ben Feldman explains it (premiums vs equity accumulation):

Men who accumulate money never have any. Put the money to work by locking it up. He walked out and the problems walk in. Someone has to unlock what he locked up. We put a bundle of money in escrow. Premium 2%, 3%, 4% per year. You can buy dollars for less than you can borrow dollars. If nothing happens, you can have your money back after the acquisition costs. $10,000 premium - show him that there's no equity the first year - If you died you wouldn't want a refund of premiums, you'd want a payment of proceeds. You're not afraid of it once you know what a life insurance contract is. Commission + reserve in the 1st year. 2nd year on what he pays in piles up. End of 10th year - worth $80k? Shows a difference of $20k. $20k / 10 years = $2,000 per year of cost at year 10. A $100,000 when you're gone wouldn't that make a difference? Give your packages different names. Same policies, but different applications/problems to solve. You make it fit. Men tend to insure everything they have what they're worth, except their lives. How much are your tomorrows worth based on the insurance you have in force right now... how much is your tomorrows worth? $100k became $300k. Underwrite today and a little tomorrow.

 

[Lloyds of Lubbock]

"If carrier A guarantees a positive return after 10 years. But carrier B guarantees a positive return after 20 years. It makes you wonder why carrier B is not willing to back up their non-guaranteed projections with a promise that is anywhere close to the projection."
If a policy is not performing close to projection, that is all on dividends, not guaranteed values.
The flow of guaranteed cash value is predicated on policy design more than anything else.
I know you familiar with Guardian so lets look a their l95 and l99. *No PUA
The l95 on guarantees blows it away in early years but the l99 catches up an surpasses it.
A lot of reserves were used in the early years so not much flowed into dividends.
Look at year two.
If a client bought an l99 and cancelled after year two, they get back nothing.
In an l95 if they cancel after year two and annual premium is returned.
Does this happen often, probably more than you think.
The dividend formula for l95 will take this into consideration and have a higher expense charge on the dividend in later years.
The l99 with the slower progression of guarantees will be providing the client with better long term performance.
The guarantees are important, I own an l95 and I am pretty sure I knew what I was doing when I bought it.
(At the end of the day, all that matters to the client is what they get for their money)
How true this is!
Please excuse any bad punctuation, I bought a European keyboard and am figuring out how to use it.

 

[PrivClientSG]

"If carrier A guarantees a positive return after 10 years. But carrier B guarantees a positive return after 20 years. It makes you wonder why carrier B is not willing to back up their non-guaranteed projections with a promise that is anywhere close to the projection."
If a policy is not performing close to projection, that is all on dividends, not guaranteed values.
The flow of guaranteed cash value is predicated on policy design more than anything else.
I know you familiar with Guardian so lets look a their l95 and l99. *No PUA
The l95 on guarantees blows it away in early years but the l99 catches up an surpasses it.
A lot of reserves were used in the early years so not much flowed into dividends.
Look at year two.
If a client bought an l99 and cancelled after year two, they get back nothing.
In an l95 if they cancel after year two and annual premium is returned.
Does this happen often, probably more than you think.
The dividend formula for l95 will take this into consideration and have a higher expense charge on the dividend in later years.
The l99 with the slower progression of guarantees will be providing the client with better long term performance.
The guarantees are important, I own an l95 and I am pretty sure I knew what I was doing when I bought it.
(At the end of the day, all that matters to the client is what they get for their money)
How true this is!
Please excuse any bad punctuation, I bought a European keyboard and am figuring out how to use it.

I think you've touched upon some interesting and valid points. I feel illustrations (showing the current, mid-point, etc. -- anything in addition to the guarantee) are nothing more than "hopeful" projections -- and you have some company's that illustrate "aggressively" and some "conservatively," so to speak. Yes, if I am looking at Mass Mutual, Guardian, NY Life, etc. -- the dividend is a variable factor. Not the only one, but one of them of course.

I agree regarding policy design and the guarantee. That is simple actuarial design and scheduling. I agree. Is the message any different on a European keyboard? LOL. That is why, as experienced professionals, we not only look at our experience, how companies and their actual policies actually perform compared to their illustration(s), but we also "de-couple" illustrations to take apart what a particular company may or may not be doing, how aggressive is their illustration, their lapse ratio assumptions, mortality, and so on and so on. This is no different than the dividend number being meaningless -- 5.5%, 5.75% , 6%, and so on. What is meaningful is the fact that it's the number MINUM mortality and expenses (and potentially other items which may or may not fall under those first two). In addition, are we talking gross dividend calculation or a net dividend calculation?

I find it interesting when some people say, "Well, XYZ company's dividend is higher/better, because they take profits from _______________, and add that into their dividend -- and ABC company doesn't do that." I've spoken with the CFO of every major mutual company, and at a certain point, (outside of policy reserves,) "cash" available for the dividend is fungible. Look at the surplus funds of these companies. That can portray a very interesting perspective on how "strong" some of these companies are...although they may not pay their death claims in a timely manner. LOL. Thanks.

 

[DHK]

. I feel illustrations (showing the current, mid-point, etc. -- anything in addition to the guarantee) are nothing more than "hopeful" projections -- and you have some company's that illustrate "aggressively" and some "conservatively," so to speak.

Not quite. The current maximum dividend allowed to be illustrated on a participating whole life contract... is the current dividend scale, meaning what they are doing right now. Of course, dividends are not guaranteed and can go up or down depending on general investment account, mortality experience, and operating costs, etc.

 

[PrivClientSG]

Not quite. The current maximum dividend allowed to be illustrated on a participating whole life contract... is the current dividend scale, meaning what they are doing right now. Of course, dividends are not guaranteed and can go up or down depending on general investment account, mortality experience, and operating costs, etc.

That's exactly my point! LOL. The current is right now. It's a hopeful projection for the future! LOL.

 

[DHK]

Fair enough. But it's not like it's a number pulled out of one's rear. It does have a basis in current reality and if the current scale is carried forward.

I just remember Marv Feldman's rule of 1:100. In one year, 100% of your illustrations will be... wrong.

 

[Lloyds of Lubbock]

Is the message any different on a European keyboard? LOL
No but the ability to use quotes, commas etc. definitely is