How Do You Get the Best Policy at the Best
Last updated on March 25,
The obvious way to compare costs of different life
insurance policies is to compare the premiums charged by
different companies for the same coverage. That works
fine for term insurance, but not for whole life.
Dividends, cash values, interest you could have
earned elsewhere and the number of years a policy is
kept in force also play important roles in determining
the actual cost.
And it is nearly impossible to tell in advance how
your premium is divided among insurance coverage,
commissions and company profits, how much goes into the
cash-value fund, and how much interest you'll earn on
the cash value.
A handful of companies use something called the
Barnes standard as a way of disclosing policy costs to
insurance pros and financial planners, but consumers are
pretty much in the dark.
Whole life benchmarks. Any agent
will gladly produce a "net cost" calculation for you.
That adds up all your premiums over a period of ten or
20 years, subtracts anticipated dividends and cash
value, then subtracts that number from total premiums to
produce a startlingly low net cost of coverage. But the
net-cost method ignores the fact that you could have
done something else with the money and perhaps earned
even more than the policy paid you in dividends.
Insurance industry analysts have tried to incorporate
this factor into newer formulas that produce a couple of
esoteric numbers called "interest-adjusted net-cost
indexes." By adding a certain level of assumed earnings,
say 5%, to the cost of your premiums, these indexes
account for the possibility that you might have chosen
to invest the money at that rate.
The "interest-adjusted surrender cost" is a measure
of the true anticipated cost of keeping a policy in
force for ten or 20 years and then surrendering it for
its cash value. The "net payment cost index" assumes you
hold on to the policy until you die.
What to ask the agent. Most states
require agents to provide these numbers for cash-value
policies if you ask for them. Interest-adjusted costs
vary according to the type of policy and your age at
purchase. Armed with these numbers, you can compare the
costs of different policies within the same company and
among different companies. What you'll discover is that
the cost of whole-life insurance is all over the lot.
Careful shopping can pay off big.
Ask the agent for the ten- and 20-year
"interest-adjusted surrender costs" per $1,000 of face
amount for the specific policy being recommended. Also
ask for comparable data for the same kinds of policies
issued by two other companies. The agent doesn't have to
furnish information on competitors' policies but should
be able to obtain approximate figures for some companies
from manuals widely used in the insurance business. If
the agent won't or can't help, call other companies
Useful though they are, the interest-adjusted
net-cost indexes are not an invariably accurate guide to
what a policy will actually cost. They are based on the
assumption that the cash values will earn a certain
amount per year.
When interest rates are higher or lower than that,
the relationships between premiums and cash values are
thrown out of whack, especially in the later years. But
the distortions affect all policies, so you can still
use the indexes as a relative measure of comparative
policy costs over the years, provided the issue dates
and death benefits are the same.