Don’t fall for the marketing hype of a life insurance company being great because their ratings are “Superior”. In the grand scheme of things, this really isn’t the most important aspect of what you should consider when purchasing of a life insurance contract. Not that it should be completely discounted, but I wouldn't make it a consideration of the highest order, maybe second or third.
Realistically you should be much more concerned with the actual performance of an individual policy from the company vs. the platitudes about financial strength and stability that a company touts in their marketing material. Because here's the truth, almost all of these companies (not all though so watch out) have stellar balance sheets–that sort of comes with the territory.
Here’s a sample from a few marketing pieces of very well known big mutual life insurers. Both of these companies are household names that any of our readers would recognize.
And here’s a snippet from yet another well known mutual.
Both of these pieces represent the typical marketing platitudes that come out of life insurance company home office marketing departments. During your training as a new agent, these are the sorts of things that you’re trained to discuss with your prospective clients.
That's all fine and dandy, but if I'm looking to maximize benefit from the cash I'm giving up, I can't blindly follow guidance based on the warm and fuzzies I get when reviewing the length of time a company has been around or the amount of money its paid to its policy holders in the aggregate.
And as for the discussion about surviving economic headwinds from yesteryear like the great depression or any other macro or micro economic catastrophe from 50+ years ago, I'd like to remind you that no one who presently works at the company was there when most of this historical doom took place. Note they all survived the economic crisis of 2008, some with bigger losses than others, so I'd say its safe to assume the industry is pretty solid as a whole.
The big problem with the bullet points
None of the statements made in either of the pieces above really make a real difference in the actual performance of the products. And that’s what matters most when you’re looking to make a commitment for the next 20 or 30 years.
When I turn 65, the fact that company A has a cash value that’s $200,000 less than company B will matter to me. The fact that company A is bigger and can list a more impressive set of statistics isn’t going to give me much comfort. I can't pay for vacations or groceries with a brochure highlighting the triple A credit score.
It’s not likely that most of us would say to ourselves, “Well, thank God I chose to do business with XYZ company because A.M. Best gave them an A++ rating. And to think I could have been giving my money to ABC company all these years and they only have an A+ rating from A.M. Best.”
Now, here's the deal. We spend a painful (in the eyes of some people) amount of time reviewing financial data from a company. The difference, however, behind what we review is that it doesn't come from any company's marketing brochure. In fact, we don't have any marketing brochures for any companies on hand.
In fact, Brandon once told me a story about an internal sales rep at a company who asked if he would like to be sent some brochures for the company that highlighted their financial strength. His reply was, “no thanks, we've already spent a lot of time reviewing your company and if we didn't have trust in your financial position and operations we wouldn't be having this conversation.”
So, while we know and certainly agree that financial ratings are important, we know from pretty healthy amount of experience that we can find more benefit from companies that don't hold an A++ AM Best rating.
We know that our readers like and have come to expect real world examples of what we’re talking about, so we are providing two illustrations that we recently compared.
- Healthy 34 year old male, non-smoker
- Not concerned with Death Benefit
- Seeking maximum cash accumulation for future income withdrawals at retirement age
- Wants to commit an annual premium of $25,000
Both illustrations are from companies that have been around since the dawn of time–as far as the life insurance industry in the United States is concerned. Both are mutual life insurers and both policies are participating whole life insurance policies engineered to minimize the base premium, maximize paid up additions, and are using heaving doses of term blending to accomplish it.
I should also add that in the interest of fairness the two companies being compared both use direct recognition in regards to the dividend treatment of loans.
The first illustration is from the bluest of blue blood mutual companies and is touted as being their very best cash accumulation focused product. Now, we can’t confirm that this is 100% true, but that’s what “they” say.
And here’s the second illustration from a smaller mutual company. We know this is absolutely the best cash accumulation scenario for this company and frankly for any other company as we compared it to quite a few other companies.
So now that you can see two illustrations from two different companies that are supposedly working toward the same goal for the client, let’s break down what the differences.
1. The first policy seems to be at a disadvantage from the very beginning because they have a death benefit of $2,000,000. While the second policy illustration is able to use a much lower death benefit of around $860,000.
Why does that matter? Isn't more death benefit for the same premium a positive thing?
In this case it matters because the client isn't looking to maximize the death benefit, he is seeking to maximize the cash accumulation of the policy. That means that the policy with the $2M death benefit has a much higher cost of insurance than does the policy with the $860k death benefit. When designing policies for a maximum cash value accumulation, the goal has to always be to minimize the cost of the death benefit.
Because the death benefit is so much lower in the early years of the policy, it allows the second policy to get ahead and stay ahead of the first.
2. At age 65 the second policy has nearly $300,000 more than the first. Consequently, the second policy is able to generate substantially more in income from age 66-100. The projected annual income is $68,700 versus $103,919.
Some of this difference has to do with loan provisions as well. And that's not a small detail. Company A will always have a loan interest rate that is higher than what is credited in dividends to outstanding loan balance. In other words, they will maintain a positive spread in favor of the company.
On the other hand, company B has a loan provision that provides the loan interest rate equals the dividend interest rate after the policy has been in force for 10 years or longer.
This distinction is crucial and as you can tell makes a big difference when comparing the income numbers.
Also, it's worth noting that while company B has a lower death benefit early on, it grows quite nicely and at age 65 is nearly $1million more than company A. That's the magic of paid up additions hard at work.
By the way, company A is rated A++ by Best and company B is rated A+.
If you'd like to see more comparisons like this for your particular situation, feel free to contact us, we're always happy to help.