It would be nice if analyzing insurance was, as you suggest, as simplie as figuring the premium and the promised death benefit. That is true with term insurance and, with important caveats noted in detail in an article on my website, “no lapse” universal life with “secondary guarantees.”

With other permanent insurance, the promised or guaranteed death benefit, in comparison to premiums paid, offers such a low return that almost no one would buy it based only on the guaranteed return. It is the illustrated or projected non-guaranteed returns, which purport to be based (but often aren’t) on a company’s current experience, which form the basis of the consumer’s expectations at the point of sale. These returns are not “promised,” as you suggest, in the sense that they are not guaranteed. So analyisis and judgment is required as to the reliability of an illustration’s non-guaranteed projections of policy performance, especially with regard to the assumptions of future charges for the underlying cost of insurance.

The guaranteed charges are much, much higher than the implicit charges used in the projections of non-guaranteed policy performance used to sell the policy. Determining whether the expectations of non-guaranteed performance are reasonable is essential. An independent and unbiased approach to the task is critical.

You’re correct that the article focused on the cash value return on the premium investment, including, through my comments, how that return can be significantly enhanced by structuring the policy to reduce commissions. The tax-free returns from the death benefit of such a policy would be significantly higher at life expectancy or beyond than the figures mentioned.

Ms. Scism said her article was limited to 700 words, and she could not address all the policy variations you mention.

As for your own group variable policy, it may be that it is not worth investing more than the employer’s term cost in this policy, or in retaining it after retirement, if the insurance charges will increase dramatically at that point.

Let me correct the common misunderstanding that policy beneficiaries collect the cash value and the death benefit of a policy. Either the owner receives the cash value upon a policy surrender, or the beneficiaries receive the death benefit – either or, not both, except in the case of a partial surrender with some of the death benefit remaining in place.

Thanks for your comments.

David

I noticed your name cited in the yesterday’s WSJ (Feb 27-28, 2010) article by Leslie Scism regarding the worthiness of whole-life insurance as an investment option. I assume you have not edited this piece. Specifically, I have found that the provisional example given at the end of Ms. Scism’s article (allegedly “worked out” by you) is at best confusing. I inquired about it but the author directed me to you.

In the example, a 40-year person buys $1 million policy, and is required to pay an annual premium of $17,750. After 20 years (i.e., after investing $355,000) the buyer’s cash value is given as $518,068 corresponding to 3.8% annualized return on the deposits.

What appears missing in the above example is the life insurance itself. Assuming that the buyer dies at the end of the 20-year period, one is left with the impression that the beneficiaries will pocket (subject to taxation) the $518,068 PLUS the insurance’s face value of $1,000,000, for a total of $1,518,068. This would make more than 12% annualized return.

The article also does not address at all variable life, does not distinguish between whole and universal life etc. I participate in a group-variable-life-insurance (GVUL) for which my employer pays all premiums. The insurance has an attractive underlying investment in equities (or a fixed-return) that provides tax-free growth up to the policy’s cost basis (deposits + premiums). However, even though the annual premiums are currently in the range of $3,000 – $4,000 (which is miles away from the above cited $17,750), it is questionable if there is any sense to assume those premiums upon retirement when they will grow fast and eventually may reach the premium cited in the above example. The premiums expenses will negate all other advantages.

Thus I have to agree with your more judicial and qualified approach. I will read carefully and follow your website.

Thanks,

T. Mazgalev

Was just visiting your blog and wanted to drop you a note.

Would like to speak with you later this week about your blog. I’ll call you tomorrow.

Cheers,
Brian