When the insurance companies launch new products for life, we noticed that the trend with these new products lacked something compared to their older counterparts. Some features either disappeared or became less generous and with continued low interest rates, some were worried that entire life insurance would struggle to compete with other savings and investment choices. Catalog
We were wondering how much of a change can now exist, so we decided to compare the cash value function of an older product for life to a new one.
Make the comparison between the entire life insurance
An advantage of staying for a while is the repository with information you collect from previous activities. We have files full of older information about insurance products that go back over a decade, and this proved to be helpful so that we could see how the policy values were calculated several years ago compared to today.
Used a randomly downloaded example from our files that involved an entire life insurance proposal for a middle-aged man in 2014. The product we proposed at the time was no longer available, but it was an extremely popular product for life that was used for cash-focused entire life insurance purchases. This is how the old product compares with the product currently offered by the same company today:
Old policy from 2014
New policy available today 2021
As you can see, there is a slight difference between the cash value accumulation of the two policies. But in year 20, this difference is about 6% lower for the newly available product. Part of this difference comes from the dividend. The dividend assumption for the 2014 policy is higher than the dividend assumption for the current product because the dividend scale at this company has decreased since 2014.
The minimum allowable death benefit for the new product is slightly higher than the old product. The new product uses a new mortality table, which requires this small change.
For what it's worth, the new product shows a higher guaranteed cash value in 20 compared to the guaranteed cash value of the old product.
New products are still competitive compared to old
From a cash building perspective, the newer products are still competitive. We can clearly see that here. However, there is a remarkable change in the new product that is less easy to quantify in a ledger that compares cash values.
The design flexibility that existed with the old product differs from the new product. While I was lucky enough to design this policy with a minimum death distribution (MEC) that was not modified Endowment Contract, I could not have designed this policy to completely clear all costs if the insurer only wanted to make seven payments to the policy. Doing so would allow for a slightly lower death benefit, but changes to the base's entire life premium would not allow for the entire first year's planned premium payment. Although it is unlikely that there is an agreement for this specific scenario, this new rule can cause major problems in other scenarios – we knew we had experienced it.
That said, for those who are not affected by this design rule change, this new product still works very well for those seeking a moderate return with several tax-deductible features that whole life insurance has to offer.
New insurance products will
7702 Tax Code modifier established in late 2020 that allows lower assumptions about guaranteed interest for life insurance products will introduce new insurances with lower guaranteed cash accumulation levels. Some believe this will create "better" products due to lower thresholds for MEC deaths. My review of available and preliminary products leaves me with my first impression, which is "better", is at best unclear.
In a perfect theoretical world where all levers remain fixed, and we only change the guarantee to allow a higher premium amount for the same amount of death benefit, then yes, everything should work to produce higher cash value life insurance products. But life insurance companies have a love-hate relationship with this type of insurance product. They love collecting prizes – especially big ones. But they also hate the restrictions that such policies place on their options for investing these premiums. You understand, if the insurance owner has an opportunity to immediately withdraw the cash value from an insurance, this limits what the insurance company can choose to do with the money collected that created the cash value. Restrictions almost always mean lower return expectations, which usually tends towards bad news for the life insurance company's investment team. They need to create a good balance between attractive products and the ability to collect and use cash from premiums to create meaningful returns. Every actuary who is worth a darn understands this and will work to achieve this goal.
So I expect products with similar non-guaranteed cash building potential as what's currently available, with much lower guaranteed cash on offer. I do not know about you, but the same as I can get today with fewer guarantees is not an extremely convincing story.
By that I do not mean to tell the story that the newest forms of whole life insurance coming to an insurance office near you will be awful. But I think making the same comparison for another eight years is likely to be similar to this one today in terms of non-guaranteed cash value with guaranteed results that are dramatically different – different in a not so positive way.
Are you going to wait? Only if you want to lose money
The additional problem that is likely to arise from making this comparison is a decision to put up with making a life insurance purchase not because you think it is a recipient from an accessibility perspective but because you do not know anyone hurry. But since they compare very much eight years later, you can take the time to find out what you might want to do.
The problem is that the above scenario is completely unrealistic for the individual buyer. It just shows how such a product constantly changed the shelf life. You can not keep the age constant.
The potential customer who contacted us in 2014 never purchased this policy. If he decided today that he was ready, then the numbers look for him now at 58:
There are two important things to note here.
First, after the year 20, he has now decreased by 18% compared to 20 years from politics when he bought eight years ago. This is a difference of $ 200,000 in what he achieved with 20 years of premium payments.
But remember that 20 years is now eight years beyond the original 20 years. So if we go back to the original point in his life 20 years – 70 years – he has decreased by 47% compared to the original scenario, which is over 1 million dollars that he does not have at that time in his life.
Now I know some may rush in and say, "yes but he did not have to pay $ 42,000 premium for all those years." I'm aware of this, and if he's like most people, chances are he did not save it either.
There is no way around the fact that delay costs money. Lost time can never be recovered. So yes, he can save more money to get to the same point, but that does not eliminate the fact that it now costs him more money to get to the same point. He could also take risky investment games to try to reach the same point. It might work; it may not. But if he had started earlier and made the same risky investment, he would also have more money.
Waiting is expensive. This is not a unique feature of the entire life insurance. Every savings and investment strategy you can use has the same consequences. Time can be your enemy or your friend. Make it your friend and make a decision.