Whole Life Blending, Does Cash Value Life Insurance Design Really Matter?

Cash Value Life InsuranceWhole life blending, as we've discussed before, is a process for designing cash value life insurance to maximize cash value available to the policy holder/client and income potential.

Still, there are those who like to suggest is doesn't matter. Those who would spend time arguing against a policy that is designed to maximize paid-up additions when it comes to your annual outlay.

We recently realized that we made a big mistake when it come to how we talk about this. And today, we'll fix that mistake.

A Common Problem I Have

I often find myself apologizing to people as I have a knack for taking what I know for granted. I dive into long discussions throwing around information like the person on the receiving end of the conversation knows this stuff as well if not better than I do. Oops.

It's hard to understand exactly what is going on, and certainly hard to appreciate what we're telling you, when you have no basis for the alternative.

Life Insurance is a Terrible Investment

You don't have to look hard to find oodles of people who will tell you life insurance is a lousy investment option–contrary to what life insurance salesman will tell you. I've spent a considerable amount of time refuting this claim, and constantly stating that what I talk about and what they talk about isn't the same thing.

The problem, though, is that what other agents talk about and what I talk about also isn't the same thing.

Quantifying What I mean

Let's take a look at an example to bring some concreteness to this whole idea. We'll take a make age 35 who plans to place $50,000 per year into a whole life policy.

If we take the traditional approach, some agent would simply specify the planned premium at $50,000 annually and solve for the corresponding death benefit. For the company I chose to run this example with, that comes out to $4,659,832.

We'll assume this individual is going to retire at age 65 and begin taking income from his whole life policy from age 66 to age 100 (most agents will assume something in the neighborhood of to age 80 because it'll show dramatically better income, I'm incredibly conservative so I build income scenarios that assume everyone lives at least to age 100).

At age 65 assumed cash value (the cash value based on the dividend) is $3,587,846, not too bad actually. By my math that's a 5.16% rate of return on a Compound Annual Growth Rate basis. Keep in mind tax free. And it also already factors in all of those nasty insurance fees you'll hear about from the opposition. This will generate an assumed income from age 66 to 100 of $160,831.

The death benefit has grown to $7,626,233, that's a 9.13% annual rate of return, again tax free when paid out at death.

This isn't too bad, but we can do better.

Enter the Blend

Policy blending, as I've discussed before, is a way to ensure most of the annual outlay is made up by paid-up additions. The exact reason for why this design is necessary in order to accomplish out goals is a tangential discussion that goes a little too much in one direction to conveniently take place during this article, so we'll revisit it in the near future to ensure we do it justice.

For a quick primer, skip to the end of this episode of the Financial Pro Cast.

When we blend the policy, it morphs into a different sort of product with a different purpose. That purpose is focused primarily in cash value and income generation, but death benefit only takes a back seat in the beginning.

We start with a much lower death benefit, just $1,708,895. But we can still squeeze all $50,000 into the policy. At age 65 our cash value is $3,807,505 for an annual return of 5.48%. This design provides us with assumed income of $170,586, or a 6.07% increase over the non blended design.

Also, our death benefit, which began $2,950,937 less than the non-blended design grows to $7,664,540 at age 65. That's $38,307 more than the non-blended design. Notice also, as a swipe against those who bemoan the notion that “when you die the life insurance company takes your money and pays you the death benefit” that our death benefit on the blended design has grown by $5,955,645 by age 65. I'll gladly take that over the $3,807,505 in cash surrender value.

For those who appreciate quick graphical comparisons on the numbers. Here's a table to help you out:

Cash Value Life Insurance

Notice also the guaranteed cash values for blended policies vs. non blended policies. We don't talk much about the guaranteed column.

It's nice to know it's there. But no company in the participating whole life arena has spent a lot of time skipping dividends. In fact, none of the big names we tend to look at have ever skipped a dividend payment since they began paying them, and that time period stretches back over 100 years–including some really tricky financial times for these companies that shadows the current financial crisis.

Still, I point this out merely to show you that on a cash value basis, blending is guaranteed to do better.

On the death benefit side, there's a slight advantage to the non-blended approach, and this would make perfect sense. If you want to guarantee death benefit, best to go with the approach that is primarily focused on death benefit.

Want More Help?

I recently had an “a ha” moment when I realized that blending for cash value purposes isn't something someone taught me to do; it's something I figured out after running countless iterations with insurance company software and having a deeper knowledge of Modified Endowment Contract mechanics.

For the last several years I've taken this knowledge for granted and just assumed everyone knew how to do it. I was reminded, however, that very little specific (and almost no advanced) training is ever given to an agent about the products they sell.

In fact, it's usually strongly discouraged. So, I can the reason your agent isn't talking about it is because there's a good chance he or she has never even heard about it.

However, you can always contact us. And we'll be happy to help you sort out ideas regarding cash value life insurance.

About the Author Brandon Roberts

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.

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