Total value of life insurance, Pt. 2
By Jeff Reed
Kestler Financial Group
Recently I started an analysis of possible methods to measure the "total value" of a life insurance contract. To refresh your memory, we discovered in part one of the discussion that while there is a general linear relationship between risk and reward within the spectrum of life insurance products, the premium costs associated with each of the types are all over the map. The result is that there is no clear relationship between the level of reward and the premium the client pays, leaving me looking for more data to arrive at a meaningful conclusion.
The next logical step in the process is to look at costs. Even that proved to be an incomplete analysis, as not all product types use an "unbundled" architecture. Whole life (WL) products, for instance, do not provide the supplemental policy charges report that universal life (UL), indexed universal life (IUL) and variable universal life (VUL) products do, leaving us no choice but to use the annual premium amount as the "cost" for that type of product. When I added the cost data to the chart we introduced in part one of this discussion, we see the following:
Again, there is no apparent relationship between the policy charges and the "reward" the policy can deliver to the insured's beneficiaries. In fact, based only on this chart, it appears that current assumption UL (CUL) may be the best "deal" out there. Institutional buyers, such as the money sources behind life settlements, would certainly agree that CUL is the most efficient type of contract. Those of us who have been around for a while, however, know that the typical insurance buyer would probably not have agreed with us over the last decade or so, as no lapse guaranteed UL (NLG) dominated the market.
So, where does that leave us? Costs and premiums are all over the map. Reward metrics are often based on assumptions and are an incomplete measure as a result. NLG no longer enjoys a significant price advantage. The only conclusion I can come to is that the best consumer value is the product that the client understands, can afford to pay for, provides value beyond simply the death benefit and provides the peace of mind the client really wants when making a life insurance purchase.
That leaves the insurance professional with a rather large challenge: becoming, once again, a student of product. Not only the various types that are out there, such as the difference between VUL and IUL and why a client would select one over another, but also the more subtle differences within each product type. The notion that there is one "best" product is simply flawed. As I prepare, we have entered this new year and my thoughts turn towards how I can provide producers with the tools needed to rebuild the product knowledge base that has been sitting on the shelf while NLG has dominated, and position us all for success. There are significant plans in the works, and I look forward to the challenge of transitioning to the next product era.