If you own a life insurance policy (or policies), it is prudent to periodically check them to make sure they are performing as anticipated. While life insurance policies are complex financial instruments, I will attempt to present a simplified process so that each individual can determine if his life insurance policy is up to snuff.
Term insurance policies are the simplest to evaluate as there is no cash value component to consider. However, depending on your age, health, and how long you’ve owned it, it may be counterproductive to make a change even if it is a less than stellar policy.
There is little difference between a term premium for a 25 year old and a 30 year old. However, there is a significant difference between the term premium for a 35 year and a 40 year old (upwards of 30%) and an even greater difference between 40 and 45 year olds (upwards of 40%). So if you analyze your five year old policy at age 40 and determine that you paid 25% more than you needed to, all other things being equal, it still might not make sense to change.
Analyzing a universal or variable policy involves a couple of steps. First, in-force illustrations should be requested from the company depicting various funding patterns and performance. Next, the annual statement should be reviewed to determine the cost of insurance and policy expenses. Comparing those to an appropriate benchmark may be difficult without involving an agent, but if your library subscribes to Veralytic Research reports, you can obtain them there.
Whole life policies are a bit more difficult to evaluate. First, whole life policies are issued by both mutual and stock companies. In my opinion, only mutual should be considered, and really only four of them: Guardian, Mass Mutual, New York Life and Northwestern. Penn Mutual currently offers a very competitive whole life policy, but they are very small compared to the ones just mentioned and thus could be more vulnerable in tough economic times.
Because whole life policies have cash value that is made available to policyholders, it becomes a critical part of the evaluation. For example, if one company’s premium exceeds another’s by 10%, but their cash value is 15% higher, that might be attractive to you, depending on your objectives.
As a general rule, the guaranteed cash value increase between years four and five should be approximately 90% of the premium, and it should exceed the premium between years nine and ten. Those numbers are approximate and will vary based on underwriting classification and age.
Some people feel that dividends should be ignored when evaluating policy because they are not guaranteed. It’s true they’re not guaranteed, but they are almost always paid, so I feel they should be considered in any evaluation.
This is a very general overview of a complex topic, but should assist you in evaluating your policy. If you would like additional help in evaluating a policy, please call or email.