A Summary of Life Insurance Policy Comparison Methods

The Summary of Policy Comparison Measures in the figure above should prove helpful in reviewing these methods and in deciding which should be used or how to properly overcome their flaws. Other considerations in using these techniques are listed below.

1. Remember that a policy comparison based on policy illustrations created by a source other than an insurance company’s home office may not be officially sanctioned, accurate, or complete. Demand computer printouts from the insurer’s home office for comparative purchasing purposes.

2. Policy dividends are not guarantees—a point the consumer often does not hear or understand (or sometimes does not want to hear or understand). The financial advisor should not only emphasize this in comparing policies but also in making presentations to clients.

3. The longer the period into the future, in which values are projected or illustrated, the less likely they are to be accurate.

4. The method used to decide rates credited to cash values and to allocate the amount of dividends to policyowners and then apportion them among policyowners will significantly affect policy comparisons. Check to see if the company is using the “portfolio” method or the “investment year” method (sometimes called the “new money” method). Most companies now use the investment year method. 

Under the investment year method, the assets acquired with the premiums paid during a particular year are treated as a separate cell of the insurance company’s general asset account. The investment returns earned by the assets in each calendar-year cell are credited to the cell. Each year as the composition of the cell changes due to maturities, repayments, sales, and other transactions, the changing investment performance of the cell is allocated to the policies that paid the premiums to acquire the assets in the cell. This method promotes equity, since policyholders receive the investment results that are directly attributable to their premium contributions.

If the portfolio method is used, all policies are credited with the rate earned on the company’s overall portfolio, despite the fact that earnings on premium dollars received in some years may actually be earning higher or lower returns than the portfolio rate. For instance, in periods of declining interest rates, the premium dollars received on new policies will probably be invested by the company at rates that are lower than the company earns on its existing portfolio. Also, when using the portfolio method, these new policyholders will benefit at the expense of the prior policyholders, because they will be credited with higher returns than their premium dollars are actually earning. Conversely, if interest rates are increasing, use of the portfolio method will be disadvantageous for new policyholders, but beneficial to existing policyholders. Make sure all the illustrations are based on the same method, if possible.

1. Supplementary benefits and riders impact upon policy comparisons. For example, the total premium for a policy with waiver of premium should be adjusted to take into account the extra charge.

2. In deciding whether to purchase whole life insurance or to “buy term and invest the difference,” be sure to consider the value of:

a. protection from creditors;

b. probate savings;

c. federal gift/estate tax savings implications;

d. state gift/death tax savings implications;

e. dividend options (such as one year term);

f. loan/collateral uses; and

g. settlement (annuity) options.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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