Exploring Key Truths about Whole Life Insurance: Truth is In. Myths are Out.

Transcription

1 Exploring Key Truths about Whole Life Insurance: Truth is In. Myths are Out.

2 Times have changed. The way many Americans view their finances today has shifted dramatically over the past few years. Today, individuals are looking to take less financial risk than ever before. Consequently, a growing number of consumers are rediscovering a financial product that has been available for years whole life insurance. The main purpose of whole life insurance is to provide valuable guaranteed financial protection in the event that the insured individual should die. But what many do not realize is that it s so much more. Whole life provides a wide array of financial benefits, including living benefits a term that refers to the fact that a whole life policy provides a ready source of funds for any purpose throughout the policyowner s lifetime. For many years, some financial experts have attempted to discredit whole life insurance while promoting the supposed benefits of other insurance policies (such as universal and variable universal life) that, in certain market environments, seemed to offer higher returns at lower costs. But what we ve learned in recent years is that those other types of policies were, in actuality, high risk since a major downturn in the financial markets ultimately required many of these policyowners to pay much more in premium in order to keep their policy in force.

3 Life insurance is an intangible. It s not like a car or an item of clothing. While life insurance can provide a good deal of protection and long-term financial security for the policy beneficiaries, the intangible nature of this product leads many life insurance consumers to pursue what they feel is a better deal when considering their lifelong life insurance needs. But it s important for those same individuals to understand these truths with respect to their pursuit of a better deal: Truth #1 Life insurance policy illustrations generally portray an attractively impossible outcome. Truth #2 Historic policy performance data is of little or no practical use in answering the question: Which policy will perform better? Truth #3 Smart consumers choose to work with insurance companies and producers who want to earn their business. Truth #4 One alternative to relying too heavily on policy illustration calculations is to use probability analysis to introduce some reality into the illustration s projections. Truth #5 Everyone loves a good deal that s human nature. Truth #1 Life insurance policy illustrations generally portray an attractively impossible outcome. Policy illustrations often quote a low price (premium) that often can t be sustained over the life of the policy. Illustrations can conceal the likelihood that the illustrated premium ordinarily cannot occur when: calculated with current expenses and returns projected decades into the future; the insurer has the right to increase its internal pricing structure; and the interest or investment return factors are assumed to remain the same (which, in reality, they never do). Even the disclaimer required by insurance regulators on every policy illustration warns of the limited usefulness of the illustration data: Illustration [results] are neither a projection nor a guarantee of future results.

4 Truth #2 Historic policy performance data is of little or no practical use in answering the question: Which policy will perform better? If there is one thing that we know about the economy, it s that it is always changing, which has had some major repercussions over the years for life insurance policyowners: Illustrations that calculated for universal life premiums in 1982 with 14 percent crediting rates created an unrealizable long-term expectation that couldn t be supported as interest rates plunged to today s low levels. As a result, most policies issued in the early 1980s that are still in force are paying only the rate guaranteed in the policy (which is invariably higher than the rate used for policies issued today). Illustrations calculating variable universal life premiums in 1997 with the regulated maximum illustration rate of 12 percent also created an unrealizable expectation as investment returns plunged in early 2000 and again in These changing conditions required the policyowner to pay additional premiums sometimes at much higher levels than those originally illustrated in order to avoid having the policy lapse during the insured s lifetime. Truth #3 Smart consumers choose to work with insurance companies and producers who want to earn their business. There s a cliché that says, If it s too good to be true, it probably is. Potential buyers often focus too much on the attractive impossibility presented by the illustration without understanding what is required in order to keep an insurance policy in force over time. It s important for consumers to be careful of how and what they are being sold. Because the right life insurance is meant to last a lifetime.

5 Truth #4 One alternative to relying too heavily on policy illustration calculations is to use probability analysis to introduce some reality into the illustration s projections. Truth #5 Everyone loves a good deal that s human nature. Interest rates in the U. S. economy have risen and fallen significantly over the last 40 years and will continue to do so in the future. Investment returns have been very volatile in the last 20 years and are likely to remain so. Because lower returns can cause a policy s cost of insurance to increase, the effect of interest rate and investment return volatility cannot be overlooked. Rather than assuming that interest rates and investment returns will not change over time (as an illustration does), using a modeling tool can help consumers get an idea of how changing interest rates and investment returns might affect their policy in the future. But: There s no free lunch. Most of us have bought enough items that seemed like a good deal but turned out to be something entirely different in the end. There are things that can and should be pursued on the basis of best price. But life insurance isn t one of those things, since the longevity of the policy is put at risk if the premiums paid are insufficient to sustain the policy over the long term. This can be done with an economic modeling technique popularly known as Monte Carlo Simulation a process by which underlying returns are randomized and recalculated for a large number of cycles in an effort to project possible future returns. These truths about life insurance may seem to be obvious. But it is human nature to have conflicted feelings about those things we would prefer not to face or act on. No one likes to consider the possibility of their passing and of course, there s no requirement that people own life insurance. Most buy it because they love someone or owe someone. Understanding the truths we ve explored here can help consumers assess their needs and make more objective and informed decisions about the life insurance they purchase for the long-term protection of their loved ones.

6 Pub 4732 (02/11) The Guardian Life Insurance Company of America 7 Hanover Square New York, NY