Re: an advantage of par whole life -- Insurance Forum

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Date Posted: Mon, August 05 2002, 17:08:01
Author: Brent D. Gardner, ChFC
Subject:

Re: an advantage of par whole life
In reply to: Rich Franzen 's message, "an advantage of par whole life" on Mon, August 05 2002, 9:27:32

>In updating rel=nofollow target=_blank >href="http://dbatitan.home.att.net/vp/">The Visible
>Policy to use a better mathematical model, I
>discovered something I didn't know before. It seems
>that by slightly overfunding a participating whole
>life policy, it is relatively inexpensive to have the
>death benefit keep up with the effects of inflation.
>
>For a thorough explanation and chart, see rel=nofollow target=_blank >href="http://dbatitan.home.att.net/vp/vl07.html#dead">D
>ead Man's Wave. I have been paying 1/3 extra than
>the required premium payment, using it to purchase OPP
>(Option to Purchase Paid-up insurance). If I keep
>this up for 14 years, premium and OPP payments could
>stop (presuming dividend scale stays what it is now).
>Yet the Death Benefit handles the negative effects of
>inflation very well. Is this a commonly known effect,
>or have I made a mistake in my spreadsheet model?

Rich,

Yes, this is common for the policy to keep up with inflation when dividends are used to purchase paid-up additional insurance.

The OPP rider you mention makes it even better, and one reason is the load on OPP is MUCH lower than the base premium. For example, your first year cash value of the base contract was zero, but the OPP premium had cash surrender value immediately.

Its easier to observe this with a Universal Life policy, because its all out there to see. For example, once you exceed the Target (whole life equivalent) Premium, usually the excess premium, less a small premium load and premium tax, goes to work right away.

For example, using my small mutual company's illustration system:

$100,000 of Whole Life on a male age 35, nonsmoker.
Annual premium = $1,197
First year cash surrender value = $0

Add $10,000 of PAR rider (similar to your OPP) in a one time single premium, the first year guaranteed cash surrender value is $9,886. That's a pretty small load, at less than 2%. A 3% load is not uncommon. To put this in perspective, this PAR rider pays 3-7% commission to the agent (depending on how much they produce).

At the end of the first year, the cash surrender value is $10,172, which reflects the first year dividend paid on that Paid-Up portion. Plus, that premium purchased $49,275 of paid-up death benefit (which grows every year they pay a dividend).

Essentially, what you've discovered is the hidden secret of Whole Life. =)

If everyone purchased a little OPP with their base policy, they performance is enhanced a lot more than the small additional premium, making it worth while for most people, whether they want to accumluate more money for some purpose such as college or retirement, or if they want to build up dividends quickly to offset premiums at an early date.

From an investment perspective, I've seen some relatively sophisticated analysis that shows that OPP, or PUA riders, can be used to reduce the volatility of an investment portfolio to a greater extent than other assets, because there is no volatility.

A banker commented on Bank Owned Life Insurance (BOLI) that what cash value life insurance was to the bank was "A long term treasury that constantly resets itself to par." Through the tax-deferred nature of the contract, compounding works fairly well.

Conservative investors do not object to owning treasuries, because they are safe if held to maturity, but they might object to the short term volatility. In that respect, cash value life insurance may even be MORE conservative, yet have a slightly higher yield -- with the power of tax deferral to boot.

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Replies:

Re: an advantage of par whole life -- Rich Franzen, Tue, August 06 2002, 5:14:43
- Re: an advantage of par whole life -- Brent D. Gardner, ChFC, Tue, August 06 2002, 14:27:52
  - Re: an advantage of par whole life -- Rich Franzen, Tue, August 06 2002, 19:09:16
    - Re: an advantage of par whole life -- Brent D. Gardner, ChFC, Wed, August 07 2002, 0:21:43