If you want to buy a whole life insurance policy, you have probably spent more hours than you would like to admit that you are fussing around on the internet and looking for tips on what makes a good whole life policy. And thanks to the modern wonders of simple website development and content creation, your appetite for information has probably been fulfilled. In recent decades, several newly developed insurance agents have appeared on websites, YouTube channels and Tick Tock … whatever they are called Tick Tock … to profess their expertise in whole life insurance and give you "advice" on how to choose a good policy.
A more common proposal – with astonishing controversy – is the so-called 90/10 split design. Proponents argue here that an insurance policy whose premiums consist of 90% surcharges and 10% regular full insurance is the perfect design that gives you all the riches you could ever achieve by owning an entire life insurance contract.
Being the guy who founded and now owns and collaborates with the oldest website with a focus on highlighting the use of cash value insurance for financial planning purposes – and being an extremely early voice that supports the idea of more surcharges being added throughout your life is in generally a good idea – you would think that I would emphatically bless this 90/10 thing. But to assume that I would arbitrarily stick to a theoretical idea and greedily advocate it without first putting it through, shows that you do not know me at all, the internet. Oh, and there's also the other thing we often say here … it depends.
So for those of you who are looking for an easy to follow rule that offers absolute and indisputable truth … I'll destroy the line and let you know now … I have some bad news.
The logic behind 90/10 Proposal
When an entire life insurance policy includes an additional driver who has paid in, it generally has a higher return. Be careful how you interpret the last statement. I did not say that the mere presents of added supplements are — entirely on their own — a good signal of a better degree of accumulation of your cash value. I specifically used the word rider because it matters.
After the idea that if a little is good, more must be better, the 90/10 proposal presupposes that more paid supplements are always good. This makes sense depending on how little you know about whole life insurance.
Although this approach is strong in highlighting a lot of cash value in the entire life policy after the first year of insurance, it may fall behind other constructions in the longer term. And since most people do not buy full policies with the intention of keeping them for just one year, it is well worth examining the impact this approach will have on cash value development 10, 20, 30, etc. years into the future.
The reason why the 90/10 idea may not give the best return – also known as the most possible cash value – in an entire life insurance has to do with how insurers treat income from other insurance components and lose income when insurers receive income – ie. . the premiums you pay – come from PUA. This is not the first time, I have addressed this fact on The Insurance Pro Blog . As early as 2013, I wrote this article that explains why we can not have axiomatic strategies for policy-making. The last point in that blog post is as true today as it was then. The idea of more is better when it comes to elements such as additional paid supplements and mixes is conceptually correct, but there are real application implications that can and can change the results significantly for better or worse. Ignoring that reality leaves us with suboptimal policies.
Evaluating the design
I took a look at three companies and their entire life products. Companies include: Guardian Life, MassMutual and Penn Mutual Two of them – Guardian and MassMutual – allow 90/10 designs; one of them – Penn Mutual – will not. So I have to settle for the closest I can get when it comes to Penn Mutual. Here are the general ledgers from each one:
Guardian 90/10 Design
MassMutual 90/10 Design
Penn Mutual ca 83/17 Design
I have included the internal rate of return for this comparison, which became very important as the Guardian encounters a funding constraint due to corporate policies that limit rider riders over time. So even if the Guardian does not allow the same amount of money in its entire life product as MassMutual and Penn Mutual, we can still use IRR to evaluate the best policyholder's cash value for premium money.
If 90/10 is truly the mecca of lifelong design, MassMutual and Guardian policies should show a higher rate of return compared to Penn Mutual. This is not the case. Keep in mind that I can not put this Penn Mutual policy together with a 90/10 design. Due to the company's limitations, I simply cannot get there in this scenario.
This example begins to discredit the claim that 90/10 is the bee's knees, but proponents would be smart to strike back with the claim that 90/10 works where it is allowed. Surely 90/10 is the superior approach for Guardian and MassMutual and no other mix of whole life to paid supplements would be better.
Here are 80/20 patterns for both companies:
Guardian 80/20 Design
MassMutual 80/20 Design
MassMutual 80/20 delays the 90/10 design for a long time, but the 80/20 approach eventually ends up. The Guardian policy faces a stricter limit on premiums later in the policy, but the internal return is better. I am also willing to bet that if I took the time to fine-tune these policies, I could get even better results for both companies-80/20 may not be the best bet.
Moral of the Story
There is no universally correct way to design a whole life policy for all situations. Although there may be broader patterns we can use; they just speed up the process by starting closer to the finish line each time. They are not the finish line itself. In addition, there is no universally correct or incorrect approach that we as agents should always have as standard.
We must take into account the circumstances and goals of each potential client and formulate a policy around that person. We must use a design that best accommodates what he or she is trying to accomplish. This also means experience and expertise. We say it depends a lot because it really depends. Expertise is less about what you know and more about knowing what you do not know.