A Wall Street Journal article last Saturday discussed the “new lease” on “long derided” whole life insurance due to what can be competitive risk-adjusted returns on certain policies.
Space limitations prevented the insightful author, Leslie Scism, from discussing in detail how the cash value and death benefits from some of the best policies can be significantly enhanced by structuring them to minimize sales commissions. She was kind enough, though, to cite figures I gave her noting how, in one example, with the typical agent-sold policy, the cash value would not equal the premium outlay until year 12; whereas, by designing the same policy with minimized commissions, the cash value almost equals cumulative premiums by the third year.
These cash value differences in the first and early policy years are magnified over time and substantially increase both cash values and death benefits in the efficiently designed, commission-minimized policy.
The article did not mention a key point – that the consumer will not hear about low or no commission alternatives from agents, and inquiries about such possibilities will be met with a range of reasons why it’s not possible or desirable to pursue them.
The Journal article is at least part of a slow trend among more conscientious and independent journalists covering personal finance to let out some of the most closely guarded secrets within the life insurance industry. That development is certainly long overdue.
#1 by T. Mazgalev on March 4th, 2010
David:
Thanks for your previous response and for this writing in which you address the WSJ article in question. The life insurance products are unfortunately and/or deliberately confusing. I’d just mention the issue you’ve raised of how much the insurance owners (or the beneficiaries) are to get back. It turns out that the answers are at least 3: only the accumulated cash value (at early surrender), the policy face value (at death), or the sum of the two. In the latest case (termed “Option B” by TIAA-CREF) the insurer has to guarantee at any time the full insurance face value, while in previous options the insurer only “worries” about the gap between the accumulated cash value and the policy’s face value. Accordingly, Option B is more expensive. Following this logic one could design an endless array of products. However, regardless of the confusing variety, all that one really needs to know are 2 basic parameters: the mandated monthly payment and the promised end- benefit. Then one can easily figure out by simple calculations whether investing the monthly payments in a given life insurance yields better or worse end-result compared to investing them in anything else (remembering to figure-in all taxes)
#2 by David Barkhausen on March 4th, 2010
Mr. Mazgalev -
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.