Blended whole life is a concept we really like. We maintain that it’s the way to purchase whole life insurance if cash accumulation is your primary goal.
Anyone who has learned that you can use whole life insurance as an asset and income tool should probably also take a look at a blended policy.
If you’ve been shown a standard whole life policy (i.e., no paid-up additions and no blending used to maximize paid-up additions), we invite you to challenge the performance of that policy against what can be done with the advantages of this truly unique blended design.
Perhaps you’d first like to see some proof to back up our claims that this blending business is truly beneficial?
Never mind that anyone with a strong fundamental understanding of life insurance products will declare blending superior. It took me a while to realize that this understanding is often lost on other agents (I had assumed they merely ignored it, but that doesn’t appear to be the case).
Such a comprehensive understanding of product mechanics is all well and good, but since we can’t immediately download it into your brain à la The Matrix, how about we show you some historical evidence?
I could call upon the policies that I’ve put in force, but I’m rather tight-lipped about clients and their policies.
I make a point of respecting the privacy of anyone that entrusts me with their personal information. Thankfully, finding a third party for an example is no problem. Allow me to turn your attention to the Bogleheads forum.
Yes, I mean that funny online forum frequented by people who idolize Jack Bogle.
And, while Brantley and I champion an analogous Bogle-like position within the insurance industry (i.e., there’s more money in making a lot of people really happy with superiorly designed life insurance products than in trying to suck as much money out of everyone we meet), there seems to be a dislike and distrust for life insurance over in Bogle-land.
So, when someone came along asking if anyone had mathematical evidence that buying term and investing the difference really works out better, it’s no surprise that the elder Boglers rallied to vilify that awful insurance product that pays high commissions to insurance agents.
Regretfully, several members with extraordinary post counts threw their opinions into the ring.
According to them, you should buy term and invest the difference because you’ll get 8% on stocks, and insurance products pay commissions to agents. I’m not sure how those two pieces of information constitute a mathematical proof, but if you have time to accumulate 5,000+ posts on a forum idolizing one guy, you may not have time to learn complicated high level math.
Thankfully, the newbie didn’t cave and actually received a little backup from others who weren’t buying the transient shrug-off some of the more indoctrinated senior members were satisfied with.
Then, along came an individual who named himself “actuary.” I have no idea if he really is an actuary (he did mention that he’s not an insurance agent), but he dropped this little note on the forum participants:
The commission and expense for whole life policy can be minimized. Many people in this forum don’t understand whole life insurance and don’t know the commission structure. So, they think whole life policy is expensive. An agent’s commission is directly related to the base face value of the policy. If you minimize the base face value and maximize the paid-up addition to the supplemental face value, the commission is minimized. Every mutual company provides this design to the customers through the blending ratio initially set when you take out the policy. Most of the time, the agents just set the base value equal to the total face value so that they can maximize the commission. That’s why the commission is 70% to 100% of first year premium for these high commission WL policies.
Okay, this is not 100% correct—insurance companies don’t start out with a blend of any sort of a given death benefit allowing the agent to just wipe out the blend and make sure that the entire thing is only whole life insurance—but it’s pretty close in terms of what we’re talking about when it comes to blending and policy design.
Anyways, the conversation went back and forth a bit more, and the actuary obliged a request to show the numbers. Here’s a screenshot of the numbers for those who don’t wish to visit the Bogle forum.
This policy started in 1992 with a premium of $8,951/year and ended up with $318,661 in cash surrender value by 2009 (the last full policy year prior to the discussion on the Bogleheads forum).
For those who are scared of doing the math themselves, that’s a year over year return of 7.76% (according to the trusty TI-83 Plus).
Gee whiz! With returns like that, who needs the stock market? I’m kidding, of course.
But, I would like to point out that, according to the awesome S&P CAGR calculator over at Moneychimp, the year over year return on the S&P 500 over the same period of time (1992 to 2009) was 7.77%. I’m attaching a screenshot if you don’t believe me.
Of course, that return would only be achievable if you paid no trading or account maintenance fees and could place all of your money into the S&P 500 from day one.
Oh, and for those looking to really have fun and keep score, I should note that the much-beloved Vanguard 500 Index Fund posts a miserable 2.55% per year return for the same time period.
And, let me also shove in that one aspect life insurance agents love to talk about: taxable equivalent yield. $8,951 is way beyond the allowable IRA limits back in 1992, and a plan started in 1992 precedes Roth IRAs by six years (they weren’t available until the passage of the Taxpayer Relief Act of 1997 and became officially available in 1998 with an initial contribution limit set at $2,000 per individual).
Taxable equivalent yield in this scenario would be approximately 10.61% – so much for those evil fees that destroy your savings potential.
Of course, it probably isn’t nearly as fun as buying term and squandering the difference. You would have needed that extra $8,000 in 1992 to buy a cell phone to call all your friends who didn’t have cell phones.
We’ve had a few people tell us that agents they spoke to reference Blease (aka Full-Disclosure) and point out that the 50/50 blend historical results lag the non-blended historical results. The more informed among you will immediately see the flaw in the logic. For those that are bit newer to this whole blending business, allow me to explain the problem.
Blending wasn’t originally designed as a means to stuff lots of extra cash into a life insurance policy. That practice was the product of people with way too much extra time on their hands who didn’t listen to their sales managers and spent their days studying life insurance mechanics instead of obnoxiously trying to sell their (former) friends life insurance.
Blending was originally an answer to an industry that went mad over driving prices down and trying to be the cheapest purveyor of lost income via death protection.
You see, some people look at a cardboard box and tell you it’s just a box.
You can put things in it and carry them around, and that’s about all it’s good for. Others look at the box and realize it could also be a fort, a race car, a cat toy, a hiding place, and a temporary solution to a broken window (among other things).
Blending gained prominence (and is still mostly used) for the purpose of lessening those “expensive” whole life premiums when an agent insists you MUST have permanent life insurance protection.
Universal life insurance allowed insurers to assume really high interest rates that conversely reduced the amount of assumed needed premium to keep the policy in force. It looked amazing on paper; in practice, it didn’t work so well, but that’s another story for another day.
Blending quickly became a method for combating this promoted feature of universal life by using term insurance and a high (at that time) dividend assumption to bring premiums closer to universal life assumed premiums. This too failed miserably to materialize in the fashion purported.
To this day, blending is a common practice used to compete on price. We don’t talk about this application often because we don’t believe it’s generally a great idea.
Instead, we use blending to do exactly what our friend from the Bogleheads forum did: reduce the base whole life premium as much as possible and extend the death benefit to increase the allowable premium under TAMRA (i.e., Modified Endowment Contract) limitations.
Doing this allows us to dramatically shift the incoming premium from an expense-heavy base whole life premium to extremely inexpensive paid-up additions.
The Blease historical report shows a lagging performance among the 50/50 blended policies because those policies were designed to calculate a premium based on a stated death benefit.
Or, more directly, it shows us the performance of policies designed to address the more traditional application of blending, cheapening the premium. It does not address blending in the sense we are discussing.
If we look at Blease, the top performer over 20 years (which is a tad longer than our example above, but that’s all they have) comes in at around 5% year over year. We can also use these pieces put out by MassMutual and Guardian to look at specific historical non-blended policies. They aren’t bad, but they’re not as good as our blended example.
There’s A LOT less money in blending when it comes to how an agent is compensated.
Agents know this, and it’s one of the primary reasons they pretend it (blending) doesn’t exist.
We’ve heard a fair number of ridiculous reasons not to blend, such as, “Only non-blended whole life insurance is pure whole life insurance, and that’s what you want.” Few things could be further from the truth.
Also, don’t fall for any claims that a product is pre-designed to be optimally funded to the modified endowment contract limit.
No company has a product that seeks to accomplish this and beats a blended product. We proved this a few weeks ago when we pointed out that one of the most aggressive marketers of such a policy, Ohio National, performed miserably compared to its own blended style product on income projections.
We have happened upon one new whole life product that appears to work better for competitive income when not blended, but this is a very unique circumstance, and it has limited applications. Most people will do far better following a blended design.
It removes considerable liquidity risk and gives the consumer way more control over the reserve development of the policy. As we can see, historically, it has smoked non-blended whole life policies in practice.
As always, if you have any questions, we are here for you.
Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. A specialist in the design and application of life insurance cash accumulation features, Brandon is one of the foremost authorities on the subject of coordinating life insurance cash values in a financial plan.