- Life Insurance Policy Audits
- Life Insurance
- Family Offices
- CPAs
- Attorneys
- Financial Advisors
Whole life insurance was developed as an alternative to term insurance, and the first policies were designed to provide life insurance protection over the insured's entire life with guaranteed level premiums that would never increase.
One of the challenges with term life insurance was that it offered coverage for only a limited period of time. In addition, as the insured grew older and the probability of death increased, the cost of renewing term coverage increased as well, and eventually became prohibitively expensive.
The most common type of whole life insurance offers level annual premiums payable to a specified age, typically age 100. In the early policy years, the whole life premiums are greater than what a comparable term life insurance policy would cost. But as the insured ages, and the probability of death increases, the whole life policy premiums remain constant.
In effect, the whole life policy is "pre-funding" the increasing cost of coverage at the older ages by paying a higher guaranteed level premium from the outset. As a result, the whole life policy builds guaranteed cash value.
The annual increases in the cash value reduce the actual net amount of insurance coverage (face amount less the cash value) over the life of the policy. This continues until the cash value equals the policy face amount at a target age, usually age 100 or beyond. In other words, the policy owner is accumulating cash value that represents an increasing portion of the policy face amount as the insured ages.
Pricing is the process used to determine premiums, cash value and dividends. The 3 main drivers of this pricing include:
While whole life insurance has guarantees, most of the time it is sold viewing current assumptions. These variables might be better, or worse, than the actual performance over time. That is why it is vitally important to perform audits of these policies over the years to make sure the policy is staying on track to meet its goals and objectives. For example, should dividend rates go down, that might imply that the number of premiums necessary to sustain the policy over your lifetime has increased. Conversely, should dividend rates rise dramatically, that could mean that the original number of premiums predicted to be needed to sustain the policy might have decreased.
In any event one thing can be sure, that the illustration you view at point of purchase will not be the actual performance of that policy over time. That is neither pro nor a con- just the reality of financial instruments.