As insurance companies roll out new whole life products, we noticed a trend of these new products lacking slightly compared to their older counterparts. Certain features either disappeared or became less generous, and with continued low interest rates, some worried that whole life insurance would struggle to compete against other savings and investment choices.
We wondered how much of a change might now exist, so we set out to compare the cash value feature of an older whole life product against a new one.
Making the Whole Life Insurance Comparison
One benefit of being around for a while is the repository of information you collect from past activity. We have files full of older insurance product information stretching back over a decade, and this proved helpful in allowing us to look at how policy values projected years ago versus today.
Used a randomly pulled example from our files that involved a whole life insurance proposal for a middle-aged male back in 2014. The product we proposed back then is no longer available, but it was an extremely popular whole life product used for cash-focused whole life insurance purchases. Here's how the old product and the product currently offered by the same company compare today:
Old Policy from 2014
New Policy Available today in 2021
As you can see, there is a slight difference between the two policies' cash value accumulation. But year 20, this difference is around 6% lower for the newly available product. A portion of this difference comes from the dividend. The dividend assumption for the policy in 2014 is higher than the dividend assumption for the current product because the dividend scale at this company declined since 2014.
The lowest allowable death benefit on the new product is slightly higher than the old product. The new product uses a new mortality table, which requires this slight change.
For what it's worth, the new product does show a higher guaranteed cash value in year 20 compared to the guaranteed cash value of the old product.
New Products are Still Competitive Compared to Old
From a cash building perspective, the newer products are still competitive. We can plainly see that here. There is, however, a notable change about the new product that is less easily quantified in a ledger comparing cash values.
The design flexibility that existed with the old product is different from this new product. While I was lucky enough to design this policy with a minimum non-Modified Endowment Contract (MEC) death benefit, I could not have designed this policy now to perfectly wring out all expenses if the policy owner wanted to only make seven payments to the policy. Doing that would allow for a slightly lower death benefit, but changes to the base whole life premium wouldn't allow the entire first-year planned premium payment. While unlikely a deal-breaker for this specific scenario, this new rule can cause major problems in other scenarios–we knew because we've experienced it.
This being said, for those unaffected by this design rule change, this new product still works very well for those seeking a moderate return with several tax-advantaged features whole life insurance has to offer.
New Insurance Products Coming
The 7702 Tax Code modifier established late in 2020 that allows lower guaranteed rate assumptions for life insurance products will introduce new insurance policies with lower guaranteed rates of cash accumulation. Some believe this will create “better” products due to lower MEC death benefit thresholds. My review of available and tentative products leaves me with my initial impression, which is “better” is iffy at best.
In a perfectly theoretical world where all the levers remain fixed, and we only change the guarantee to allow for a higher amount of premium for the same amount of death benefit, then yes, everything should work to produce higher cash value life insurance products. But life insurers have a love-hate relationship with this sort of insurance product. They love collecting premiums–especially large ones. But they also hate the restrictions such policies place on their options for investing these premiums. You see, if the policy owner has an option to immediately withdraw the cash value from a policy, this limits what the insurance company can choose to do with the monies collected that created that cash value. Limitations almost always mean lower yield expectations, which usually tends toward bad news for the life insurer's investment team. They need to strike a good balance between attractive products and the ability to collect and use the cash from premiums to generate meaningful returns. Every actuary worth a darn understands this and will work to accomplish this goal.
So I would anticipate products with similar non-guaranteed cash building potential as what's currently available, with much lower guaranteed cash offered. I don't know about you, but the same I can get today with fewer guarantees isn't an extremely compelling story.
This being said, I don't mean to construe the narrative that the newest forms of whole life insurance coming to an insurance office near you will be horrible. But I think making this same comparison in another eight years will most likely look similar to this one today in terms of non-guaranteed cash value with guaranteed results being dramatically different–different in a not-so-positive way.
Should you Wait? Only if you Want to Lose Money
The additional problem that likely comes up from making this comparison is a decision to hold off on making a life insurance purchase not because you believe it's beneficiary from a policy availability perspective but because you don't feel any urgency. However, since they compare very similarly eight years later, you can take your time to figure out what you might want to do.
The problem is that the above scenario is entirely unrealistic for the individual buyer. It only shows us how such a product changed holding age constant. You cannot hold age constant.
The prospective client who reached out to us in 2014 never bought this policy. If he decided today that he was ready, here's what the numbers look like for him now at 58:
There are two critical things to notice here.
First, by year 20, he's now down 18% versus 20 years out from policy inception when buying eight years ago. This is a $200,000 difference in what he accomplished with 20 years worth of premium payments.
But remember that 20 years out now is eight years beyond the original 20 years. So if we go back to the original point in his life 20 years out–age 70–he's down 47% versus the original scenario, which is over $1 million he doesn't have at that point in his life.
Now I know some might rush in and say, “yeah but he didn't have to pay the $42,000 premium for all those years.” I'm aware of this, and if he's like most people, there's a good chance he didn't save it either.
There's no way around the fact that delaying costs money. Time lost can never be regained. So, yes, he can save more money to arrive at the same point, but that doesn't eliminate the fact that it now costs him more money to arrive at the same point. He could also take riskier investment bets to try and arrive at the same point. It might work; it might not. But if he had started earlier and made the same riskier bet, he'd also have more money.
Waiting is costly. This isn't a unique feature of whole life insurance. Every savings and investment strategy you can employ carries the same implication. Time can be your enemy or your friend. Make it your friend and make a decision.