Comparing Cash Value Life Insurance Policies

Comparing cash value life insurance policies can be very difficult. When shopping for cash value life insurance, consumers are frequently given sales illustrations from competing insurance agents. These sales illustrations can be valuable in helping you understand how a particular policy will work under certain conditions. However, these illustrations are almost worthless in comparing one company's products to another.

Many consumers look at sales illustrations and buy the illustration that has the lowest premium, the fewest years of premium payments, or the highest cash values. Consumers who do this will likely purchase insurance products with aggressive interest and mortality assumptions. When these interest and mortality assumptions do not materialize, the premiums may be higher than illustrated, premiums might have to be paid for a longer period of time, and cash values could be lower.

A consumer's first step is to question the interest assumptions in the sales illustrations. Most insurance companies need to make about 1.5% to 2% more than their portfolio earns. Since life insurance companies mostly invest in corporate bonds, it is unrealistic for an insurance company to assume a 9% rate of return when bonds are yielding 7%. Considering the investment spread an insurance company want to make, a more realistic interest assumption might be 5-5.5% in a 7% bond market! Do not be reluctant to have an agent redo the illustration, assuming a rate below the company's current crediting rate. By doing this, you will see a policy's vulnerability to interest rate changes.

Another way to better understand a sales illustration is to ask your insurance professional for a copy of the Illustration Questionnaire (IQ) for the company (s) that you are considering. To expose unscrupulous and overly optimistic insurance company illustrations, the American College of CLUs and ChFCs has put out a questionnaire to major insurance companies regarding the integrity of their illustrations. This questionnaire asks the companies about their interest assumptions, mortality assumptions, and other factors which define the insurance illustrations.

Unfortunately, the insurance companies do not always make full and perfect disclosure in their responses. However, reading and understanding the IQ will be instructional and will make you a much more informed insurance consumer.