I'm sure there are some of you who will pick up our little easter egg in the title of today's financial procast. For those who remember that great scene from the movie, Tommy Boy, I give you permission to skip down to the bottom of this page to watch a little clip.
And for those who have no idea what I'm talking about, do yourself a favor and skip down to the bottom of the page and watch the clip. Most likely you'll enjoy that much more than reading anything in between.
You're welcome by the way, we aim to please here at the insurance pro blog.
Are Life Insurance Guarantees Important?
Whole life touts higher guarantees but counter party risk will always exist, and just because a carrier issues a contract with higher guarantees does not mean that it benefits the policyholder.
Case in point, there is one whole life insurance company that has issued whole life contracts with a 4.5% reserve rate for years, and it’s a terrible cash accumulator and the internal rate-of-return (IRR) on death benefit is atrocious. No, we're not naming names here but if you'd like to know who it is, contact us and we can let you know who it is.
Do we see things that make us believe the whole life focused carriers are more profitable and can bring better returns to policyholders?
Not really here are the numbers:
Average yield on investments for WL carriers: 5.32%
Average yield on investments for IUL carriers: 5.8%
Average net income among WL carriers: $169,709,000
Average net income among IUL carriers: $850,827,170 (5x the WL companies)
Average net income to revenue WL carriers: 1.29%
Average net income to revenue IUL carriers: 6.37%
Average Revenue/income WL carriers: 11.97%
Average Revenue/income IUL carriers: 9.33%
Average admitted assets WL carriers: $86 billion
Average admitted assets IUL carriers: $87 billion
Average ROE WL carriers: 6.04%
Average ROE IUL carriers: 13.95%
Average interest margin WL carriers: 67.56%
Average interest margin IUL carriers: 52.87%
Average surplus ratio WL carriers: 12.93%–> $11 billion in surplus
Average suplus ratio WL carriers: 10.95%–> $9.53 billion in surplus
The truth is that carriers who generate most of their revenue from universal life insurance have a lot more free cash flow from operations, meaning they can absorb a bad year more comfortably than WL carriers. We’ve seen this play out more recently, div rates have bounced around a lot, cap rates on IUL have remained pretty consistent.
The carriers who focus on participating whole life insurance do have a larger surplus position, but this only generally affects death benefit reserving strength, it's not as important when evaluating their potential to provide better cash accumulation. Though it shouldn’t be completely ignored, since a strong surplus position could help pay dividends or interest in a given year. It could also help defer expenses from a bad year or economic situation.
Another advantage that many companies who focus on universal life is that they generally have access to certain capital that goes beyond reserves (public companies have access to capital markets). Mutual companies are way more dependent on surplus since the only other option is a surplus note, which somewhat more restrictive. Additionally, whole life insurance in general requires higher reserving.
Our big takeaway is this: universal life insurance carriers want to be just as competitive as those who focus on whole life insurance and will not drop contract benefits unless they really have to. The fear mongering from mutual companies is not warranted as the numbers just don't add up.
Yes you could make the point that whole life insurance focused companies do pay substantially more dividends and one could argue this drags down the net income number, but the truth is that universal life insurance companies carriers pay interest instead of dividends, maintain competitive products, and still have better net income.
And for those of our readers who have a sense of humor similar to ours, here was our inspiration for this show. Warning: if you are offended by profanity, you might avoid watching this.