"The Wealth Pre$ervation Company"

Using the model of product sold by most large mutual life insurance companies  (PRU, MET, NYLIC, Mass. Mutual, etc.), the annual premium paid at the inception of the policy is guaranteed never to change.  The death benefit is also guaranteed never to decrease from its original sum.  It can, however, grow larger through the application of dividends.  The basic policy cash value is guaranteed.  The total policy cash value, part of which is comprised of dividends, is not guaranteed. 

Many class action lawsuits were  brought in the mid 80's and early 90's over a concept called "vanish premium" which comprised the bulk of Whole Life sales during the last decade.  The sales illustration shown to the client in these situations displayed an absence of cash premium payments after, 8-10 years.  This was accomplished through the use of policy dividend manipulation, and therefore was based on dividend projections.  The contention of the class actions were that the buyer was not informed that the last year of cash premium payments, before dividend took over was simply a projection and not a guarantee.  It is the number of years of premium payments and the lack of guarantee on  same that represent the only risk existent in this product design assuming that the insured wishes to follow the "vanish" model. 

The downside of the Whole Life design lies n the fact that the insured cannot take advantage of rising interest rates to reduce insurance costs.  Only one element of the policy dividend is represented by the investment return of the insurance company, (one of three). Dividends may, however, comprise a significant portion of the total cash value in a traditional participating Whole Life Policy over the long run. 

II. Universal Life

  With the dawn of the computer came Universal Life.  The ability to separate the cash value element of a permanent life insurance policy from the pure insurance protection element ,allowed interest to be credited to that portion of the premium not required for mortality costs. 

          Using a single $ as an example, mortality charges, asset management fees, policy fees and sales charges are first deducted from that $ and interest is then credited to the portion of that $ remaining.  Since mortality charges are based on age, each year as the insured moves closer to mortality, less of each dollar is left to receive interest credits. 

          In considering this form of insurance, the most important decision to be made is " how much $ to put into the premium"? 

          The closer the premium is to the actual cost of mortality, the less $ are available to receive interest credits.  Conversely, the greater the $ volume going into the contract, the greater will be the cash accumulation (reserve) and the smaller will be the percentage of that total cash required for mortality costs. 

          If the same premium dollars are allocated to a Universal Life policy as would be allocated to a Whole Life policy issued for the same coverage amount, at the same age,  close to a no risk situation is produced. 

          Obviously, in striking parity in costs between the two policy forms, the insured loses the potential advantages of rising interest rates to reduce insurance costs. 

          An educated balance must therefore be struck between the optimal premium (Whole Life) and a somewhat lower premium, anticipating future interest rates. This can be done by looking at three premium levels. 

The maximum mortality charge is guaranteed in the Universal Life policy design and is usually a multiple of the current mortality charge.  We know of no insurers  who have charged maximum mortality rates in the history of this  product.  These rates are available to the companies in case of dramatic decreases in life expectancy but experience along with competition is reducing these rates not increasing them.  It is also possible to buy various lengths of death benefit guarantees in some but not all states. 

Risk rating 4 in this product design. 

  This product contains all of the same elements of the Universal Life product design, the mayor exception being the cash value (reserve) which is comprised of Mutual Funds.  Many of the "fund families" available in this product have track records, longer than this form of policy has been marketed. 

          Of late, products have been introduced with very low mortality charges (particularly at older ages) low asset management fees and death benefit guarantee periods ranging from 3-20 years. 

          Once again, the most critical element in the decision making process is the volume of $ allocated to premiums. 

          Note: We have seen a number of projections based on a $1,000,000 policy for a 57-year-old male, non-smoker.  Given all the cost elements with an extremely competitive product, we find that the market performance of a conservative stock mutual fund at 10% will keep the death benefit in force through age 100. At 8%, the benefit expires in the late 80's age range and at the guaranteed interest rate at age 69. (4%) 

          These expiration ages involve one-time lump sum deposits with no ongoing premiums.  Obviously if the stock market fell precipitously, the contract would require more premium $ so that a level death benefit could be maintained.  The actual volume of $ can be estimated by running different computer models at different assumed investment return rates. 

          In a real world scenario of course, the mutual funds in these products do not perform in a fixed yield fashion over  long periods of time.  Even in a stock fund, the portfolio moves in and out of cash, based on the judgement of the fund managers.  

At Minus 100 Basis Points:             
     

B. Sun Life of Canada 

IMPACT OF VARIABLES ON POLICY COSTS 

II.   Universal Life 

Death Benefit Runs to age 100 at Current Interest Rate
Death Benefit Runs to Age 89 at Minus 100 Basis Points 

IMPACT OF VARIABLES ON POLICY COSTS 

III.           Variable Life 

Note:  If earnings fell to 8%, death benefit could be maintained at $1,000,000 by paying $22,352 level, each year. 

These benefit projections assume no change in mortality or expense charges.

Conclusion

Variable Life Products give the buyer the greatest management ability over the risks and ultimately the costs of their life insurance purchases. 

          As long as the buyer understands that additional premium over and above the initial level elected may, ultimately need to be paid, the product is worthy of serious consideration. 

          If the buyer is 100% risk adverse then the Whole Life product with its inherent guarantee of Death Benefit, basic cash value and annual premium levels will be the preferred choice. (See Sun life under Whole Life section of study). 

          Universal Life leaves the insurance carrier in the sole position of deciding interest credits to the product and ultimate mortality charges.  Universal Life therefore dictates its performance to the buyer and offers that buyer the least control over his/her ultimate insurance costs. 

Note:  The figures shown herein were gathered in 1998 and have not been revised to reflect current policy performance. Policy illustrations are projections only, They are, however, useful to "keep track" of policy performance. The annual premium should be adjusted each year, upward if returns are lower than projected at the inception of the policy and conversely downward if returns remain significantly and consistently greater than originally projected.