Take Another Look at Whole Life
Last week I talked about possible underperformance of Whole Life contracts. The one aspect of that discussion that was not really addressed was the role of guarantees, and how Whole Life can stack up against some of the more heavily promoted products such as Indexed Universal Life. Let's face it; if an IUL contract performs at the guaranteed minimum, the cash growth will be quite anemic and, depending on funding levels, can even lose money. That's right; lose money even with a guaranteed performance floor. It’s those pesky mortality and expense charges that crash the party.
Of course, when we start talking about Whole Life and guarantees, we have a lot of the same issues: funding levels, projected performance, mortality and expense charges. The one thing we can count on, however, is the guaranteed performance in the form of both death benefit and cash value. Rather than there simply being a floor each year, the actual cash value is guaranteed to go up each year. The assumption by the field is this product is too expensive and lags behind IUL from a cash accumulation standpoint.
The truth may be a bit more complex than that.
One of the fundamental questions we need to ask ourselves and our clients is what role they want their life insurance to play in their overall plan? Is it one of their aggressive positions or their "safe money"? In most cases, anyone who is contemplating allocating a significant premium to a life insurance contract has other investment positions. They may not need to hit the grand slam that some of the IUL's promise, and something that they can count on like guaranteed cash value growth may be just the thing to balance out their more aggressive positions.
So how would we execute on this? Let's take this scenario:
» Male age 46
» Preferred Nonsmoker
» $50K annual premium paid via Section 162 Bonus from their employer
» Double bonus structure pays for the taxes due on the total bonus
What does the performance look like at age 65? How about $1,140,577 in cash and $2,726,368 death benefit on a guaranteed basis? Projected levels? $1,403,117 in cash and $3,225,267 in death benefit! Great! We like the idea so far, but how does it compare to the IUL market? Even if we consider this an "apples to oranges" comparison because of the fundamental difference between the products, let's take a peek at the IUL performance and the assumptions we would need to make in order to hit the same projected cash value number at age 65. I'll take it easy on the IUL guys and use current mortality and expense charges.
» Carrier 1 - Approximately 3% to match the guaranteed CSV, 5% for projected CSV at age 65
» Carrier 2 - Approximately 4% to match the guaranteed CSV, 6% for projected CSV at age 65
» Carrier 3 - Approximately 4% to match the guaranteed CSV, 6% for projected CSV at age 65
I think we will all admit that these are attainable in an IUL contract (and perhaps we would all be better served using these rates all the time, but that is a topic for another day). However, if we apply a couple more factors to this decision making process that may change. The first is that we used current M&E. Most of the carriers we use do not fiddle with M&E on in force contracts. Ever. But in an IUL they can, and we have to consider it. The second is that with IUL it is an "either or" conversation - you receive the guaranteed performance or the current performance, whichever is higher. With WL, you get BOTH. Every year. Consider the question about the role of life insurance in their overall plan and we start to see this transaction in a different light.
There are a number of other factors that enter into this equation that are best served by evaluating on a case by case basis, but I would be ready to address the following on my next case:
The relative premium flexibility, particularly if this is not a Section 162 that the employer has committed to. For a personally funded case the flexibility of the IUL has to be considered. If it is too large a factor, however, then perhaps life insurance is not the best fit for that client in the first place. Loan mechanics: Direct recognition, participating loans and interest rate assumptions will all have huge impacts on the income distribution phase, and we have not addressed those at all here. The actual income the contract can generate!
As always, what starts with a rather simple premise - "How does WL stack up against IUL?" - evolves in to a much more complex discussion. The recurring theme, however, is that we need to question the conventional wisdom and apply some critical thinking to do the best work we can for our clients.