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
These are all rather straightforward. Unfortunately, including the balance of the variables injects ever-increasing levels of complexity into the equation:
  • Guarantees of various types
  • Carrier strength
  • Time horizon
  • Policy expenses
  • Available riders
The list goes on and on. One of our carriers, MetLife, has developed an interesting approach to the total value conversation. The MetLife life insurance selector tool guides clients through any number of decisions around their insurance purchase: term versus permanent, blending term and permanent, as well as the various types of permanent insurance. The interview process described by MetLife is intended to point the client to the policy type that is most appropriate for their needs. One could argue that this is the product that represents the best "total value" for the client, but it is a far cry from a definitive analysis of the feature set of each product type and the corresponding cost.
While the tools from MetLife are great, they are limited to their products only — and really only address the client-focused variables. So let's expand their discussion to include the total product spectrum and begin to understand the total value equation in more detail:

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.