How to Evaluate Whole Life Insurance Policies

Selecting the best cash value life insurance policy is a difficult task involving a number of complicated concepts and analyses. However, because the level of dividend payments on participating ordinary level premium life insurance is a critical element of the overall cost of the protection, one primary area of focus should be how the company determines the dividends it pays.

Evaluating the Dividends Paid on Par Policies

Compare the current rate credited to policy cash values and the length of the guarantees. All else being equal, policies with higher current rates and longer guarantee periods will be better than those with lower current rates and shorter guarantees.

Check to see how the company will determine the rate credited to policy cash values after the guarantee period. Policies that determine the rate based on a specific money rate or bond index leave the company with little room to manipulate the amount credited in an adverse way.

Look at the current mortality and expense factors and compare them with the guaranteed maximum mortality and expense factors. The mortality factors currently used should be competitive. If the difference between the current mortality rates and the maximum rates is small, the company has little room to use higher mortality charges as a means of reducing the effective rate credited to cash values.

Look for a bailout provision that reduces or eliminates surrender charges if investment performance does not meet reasonable guidelines.

Check the policy loan provision to see if the company uses an “offset” provision to credit borrowed amounts with a lower rate than nonborrowed amounts. If the insured anticipates borrowing from the policy, a company that does not use the offset method is preferable. If borrowing is not anticipated, a company that uses the offset method may be more desirable because the company, in theory, should be able to credit higher interest to policies without borrowing than they otherwise would be able to credit without the offset provision.

In the past, some insurance companies attempted to increase their portfolio yield by investing a substantial portion of their assets in relatively high yield but also high risk “junk” bonds. As a result of adverse market conditions and increased defaults on these bonds, some of these companies experienced serious financial stress and reduced portfolio yields.

Using the Ledger Statement of an Ordinary Life Policy

What to look for in the ledger statement of an ordinary level premium policy is similar to the items that one should evaluate in relation to any whole life policy. 

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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