Total value of life insurance, Pt. 1
By Jeff Reed
Kestler Financial Group
One of the fundamental debates we are starting to see as a result of AG 38 is which of the myriad permanent life products available in the market is the best consumer value. Long-time readers will more than likely anticipate my opinion: it depends on the client. What is perhaps a more useful discussion, however, is the notion of how to go about quantifying the "total value" of a life insurance product.
Which variables should be considered? How should they be weighted? How to integrate the needs and attitudes of the client into the discussion? I'm confident that the ultimate calculation is beyond the scope of this column, but given the transition the life insurance industry is in the midst of, identifying the variables is certainly worthwhile.
First, the obvious:
- Premium, measured by the net present value
- Face amount, measured by the internal rate of return
- Cash value, measured by the internal rate of return
- Guarantees of various types
- Carrier strength
- Time horizon
- Policy expenses
- Available riders
In general, there is a trend of higher levels of risk and correspondingly higher potential rewards as we move from left to right. No surprises there. Unfortunately, that is not nearly enough to understand the relative value of these products. As more data is added to the chart, however, a story begins to unfold. By overlaying premium* on this spectrum, for instance, we can see that the relationship between premium and potential reward is anything but linear.
Clearly, focusing on price as an indicator of value is not enough, nor is a simple risk/reward discussion. We need more data. The next step, which I will cover in part two of this series, is to consider the actual policy charges. One last thing: Despite all the analysis, the ultimate value of a life insurance contract is what it does for the loved ones left behind. Let's not lose sight of that in the midst of this discussion.
*Male, age 55, Preferred Nonsmoker, $1,000,000 face, guaranteed to maturity or to endow.