Blended whole life insurance has long been a mainstay subject at the Insurance Pro Blog. Dare I go so far as to say it’s the subject that acted as the catalyst for the site’s existence (that might be a tad sensationalist, but also not incredibly far off from the truth).
We’ve explained numerous times how it works, and why it works. We even have historical evidence for its proof of concept. But, in the interest of cash optimization there exists another question that is a tad out of left field, but extremely important. Practically speaking, does it work?
This seems like a question with a pretty obvious answer. We’ve done this more than enough times to offer up considerable proof that it does in fact accomplish what we’ve said it accomplishes. But as a matter of practice, there is one tiny nagging fact that even we must admit hangs out there on the longer end of the tails of any distribution curve of fact patterns that gauge the effectiveness blending has for cash value maximization/optimization.
That Nagging Truth
Truth is, it doesn’t always work. The good news is, we know this from the beginning. Which means we aren’t going to find ourselves in a situation where 10 or 20 years down the road we look back and say “oops.” Nope, the notion that makes us realize the limitation (and that’s really not the best word to use, it’s appropriate nonetheless) comes from a strong understanding of whole life insurance mechanics mixed with the bigger limiter on how blending works overall…company practice (i.e. self imposed limitations).
Insurance Companies can’t get out of Their own Way
As we mentioned before, there is no uniformity in the particular pieces and part of a whole life insurance contract across companies. While the basic items are there, the price function of various features can (and does) vary a lot.
This is important because while blending may be the generally optimal way to design a whole life insurance contract to maximize cash value performance, it means at times it may not be not because the fundamental process of blending is somehow flawed and fails to perform, but because the insurer operates with a certain character flaw that makes blending counter-productive.
As we’ve also covered before, no two carriers approach blending in the same way. While the very basic stuff is there, like there is term insurance that is used to increase the death benefit, and we can fill in the reduction in premium by virtue of using that term insurance with ***paid-up additions***, the way the term insurance works from one carrier to another can vary widely.
We’ve also pointed out in the past that paid-up additions riders ***can vary*** from carrier to carrier. Some have a much more rigid practice, while others approach it with a lot more flexibility.
Skip the Blend and do Better?
While we can certainly find examples of non-blended policies working out better than their blended counterparts compared to internal company products. We’ve yet to encounter a situation where a non-blended product was ultimately the best choice for cash accumulation on all whole life policies compared—and I seriously doubt we ever will find a situation like this.
But, there may come times when a non-blended option is the only choice due to various restrictions. This comes up a lot with juvenile insured situations. Because death benefits can rise very quickly in these situations, some carriers with better blending practices tend to avoid these cases due to the large liability (in terms of death benefit) they could one day represent. Carriers willing to take these cases either don’t allow blending on juvenile cases, or have an array of design quirks that make it work out less favorable.
There are also times, when retirement income scenarios project better when a non-blended option is taken (again generally an outside company with a blended product is still on top, but internally with some companies the favored approach is the non-blended design).
To be Clear, the Theory isn’t Wrong the Practice is
I’ve already said it, but I want to highlight it again here. The theory behind why blending works is not incorrect. There is nothing about blending that would cause this circumstance of not always being the optimal choice. The driver behind this notion is company self-imposed restrictions that cause problems for policy blending and/or make it less attractive.
Unfortunately in the past, we’ve been able to somewhat easily detail what to look for and how to navigate this subject. Unfortunately, that’s not quite as easy here. I’m afraid this one can’t be answered in an 800 or so word article, nor can it be distilled to a quick reference guide. For this particular situation, you’ll need a little more professional expertise mental muscle flexing.