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Should Healthy Seniors replace old policies?

Should Penn Mutual’s Old Policyholders in Good Health Replace Their Long-Held Policies? What about such policyholders at Mutual Trust Life? (Having nicknamed itself “The Whole Life Company,” makes one wonder, how good must its policies really be?) Moreover, what about policyholders at most other life insurers that have failed to publicly provide historical policy performance information?

For many in the life insurance industry, such questions about policy replacement are heresy. Conventional thinking regarding whole life policies often runs along the following line: Don’t replace a policy bought 20 years ago because you couldn’t now get as low of a premium. A Prudential NY Times advertisement has stated, “In most situations the life insurance that you already own is your best buy.” Such misrepresentations or misconceptions are largely-irrelevant life insurance hogwash masquerading as financially-astute advice. The decision to keep or replace a policy primarily depends, not upon misleading premium comparisons and/or idiotic slogans, but upon a comparative financial performance assessment of policies/insurers.

For simplicity in this current example, let’s assume possible replacement of these insurers’ whole life policies would only be with other traditional cash-value policies. Consequently, then, the objective of this replacement assessment example is to find a policy that offers the prospects for the best future long-run combination of cost-effective internal charges and competitive compounding of one’s cash-values. In traditional cash-value policies, it is via such combined performance that the value of a policy’s death benefit is maximized.

Part 1 – Future Cost Assessment

Recently released data for a $250,000 Penn Mutual whole life policy issued in 1989 to a 45 year old male has been analyzed by It shows, based on Penn Mutual’s 2009 declared dividend rate of 6.34%, that the insurer’s current costs/thousand dollars of coverage (Costs/M$AR) for this insured (now age 64) were $18. Given that a currently-available competitive cost/M$AR for a healthy 64 year-old male is less than $10, significantly more attractive on-going mortality charges are available for Penn Mutual’s healthy long-time insureds of retirement ages. Recall that Penn Mutual’s current insureds’ future mortality costs may be largely “already set in stone” because Penn Mutual’s relevant future costs are based on its existing poll of insureds, which has resulted from the insurer’s sales and underwriting practices of the past 10, 20, and 30+ years. Also, there’s no evidence that the company’s experience on its 64 year-old insured males is a company anomaly. For such reasons, a life insurer’s past/current mortality performance is indicative of its future mortality performance (unless of course it begins using new business to subsidize old business, but that’s never really been a very popular practice in this sales-driven industry. And, as will be discussed in a future blog, it definitely does not appear to be Penn Mutual’s current strategy.)

Part 2 – Future Investment-related Performance

Another big issue to assess concerns Penn Mutual’s future dividend rates (a.k.a. investment returns passed through to policyholders) versus other insurers’ likely future dividends/returns. Everyone, of course, wishes he/she had a functioning crystal ball for such assessments of future investment performance; but, as everyone knows, no one does. Nonetheless, there are accepted due diligence procedures to making assessments about such.

Although investment-related advice admonishing that “past performance is not an indicator of future performance,” is often stated by agents, advisers and others when discussing cash-value life insurance, this admonition with respect to traditional whole life policies is belied by empirical data. Quite simply, recent past performance is indicative of near-term future performance because life insurers’ investment portfolios are not marked to market and change only slowly. The statistical likelihood that Penn Mutual’s dividend interest rate over the next 2 years climbs to 7.5% or falls to 4.5% is insignificant; it’s not going to happen. For non-variable life insurance policies, near-term future investment-related performance is closely correlated with current dividend rates. The implications of this fact are that policyholders can have greater confidence in making assessments and changes of traditional cash-value policies than they can have with respect to other investment-related decisions. That is, there is: 1) little likelihood that the replaced policy’s values would suddenly soar, and 2) little likelihood that an acquired traditional policy’s performance would suddenly plummet.

Decisions regarding cash-value life insurance policies should, of course, be based on long-term perspectives on likely future years’ performances. It is on such matters that the admonition regarding past performances has some validity. Historical performance, current financial holdings, and statements of investment principles/objectives are three commonly used methods to assess future performance. With respect to historical information, a comparison of Penn Mutual versus Northwestern shows that Penn Mutual has lagged Northwestern’s average dividend rate over the last 20 years by more than 70 basis points. Current financial holdings can be obtained from Penn Mutual’s annual financial statements and/or analysis of such. Obviously, in conducting a full replacement assessment, many other insurers and possible policies would be investigated. The upshot of this single comparative example is that Penn Mutual is unlikely to be an industry leader in either investment performance or financial strength ratings over the next 20, 30, or 40 years. Again, contrary to the life insurance industry’s conventional advice, there are clearly reasons to evaluate the replacement of old policies.

Part 3 – Transaction Costs

A final hurdle that must be cleared before a replacement is justified is the transaction cost. There are, of course, “no-load” or low-load life insurers such as TIAA and USAA, but more importantly, there are many ways to minimize sales compensation and other related set-up costs on many other insurers’ new policies. In general, if a policyholder (likely to have coverage in-force for at least another 15 to 25+ years) has the prospects of X% (i.e., 60%) lower future mortality charges and of earning Y% (i.e., ½%) percent more annually on cash-values, then a new policy that can be acquired for some Z% or less in initial costs could provide significantly greater long-term value. Again, the upshot of this example is to show that there can be very good reasons for healthy insureds to evaluate the replacement of old policies that are not performing competitively. (For less healthy insureds, the assessment obviously requires taking such into account, but even for some with minor health issues, a replacement assessment is seldom as cut-and-dried as the anti-replacement rhetoric would make one believe.) This is not to be interpreted as endorsing most agent-recommended replacements because such are typically based upon simplistic premium or illustration comparisons, rather than a real and thorough financial analysis. Evaluating the replacement of a policy involves obtaining good information, not life industry hogwash, nor fanciful illustrations.

Mutual Trust Life, MTL, a little Illinois insurer, touts itself as “The Whole Life Company,” and proclaims its company vision is “to place in the top five of all companies for ten-year historical performance.” To my knowledge, MTL has never even come near its happy-talk goal, and it may have about as much chance of ever achieving such as I have of being a top five contender to Mr. America. MTL’s 20th year’s performance on a $250,000 whole life policy issued in 1989 is quite similar to Penn Mutual’s. Specifically, it’s annual Cost/M$AR in 2009 for a 64 year-old male who bought coverage years ago is also approximately $18, and its dividend rate, which apparently varies across policies (that is, it is not uniform – a most “interesting” management practice) averaging in 2009 about 6.5%. So everything already discussed about the likely advantages to healthy insureds of retirement ages replacing old Penn Mutual policies seems equally applicable to Mutual Trust Life policyholders. Furthermore, despite its own blustery touting, MTL’s diminutive size will most likely present serious challenges for its long-term independent survival. In addition to the above analysis, MTL is being introduced to our readers in this report because this little Illinois insurer with its happy-talk vision and its huge, cross-state rival, State Farm, will be the subject of a future blog entitled: “The Battle of Two Illinois Life Insurers: Whose Whole Life Polices Are Worse?”

Concluding Thoughts

These three insurers, however, all deserve praise – if not for their whole life policies’ financial performance, then at least for these companies’ openness – or disclosing the financial performance of their 20 year old cash-value policies. Most other insurers, hundreds in fact, many with better known names, have failed to voluntarily and publicly provide 20 year historical data on their policies. It was, after all, the NAIC – The National Association of Insurance Commissioners –in the mid 1990s that deleted disclosure of policy performance data from insurer’s mandated, regulatory Annual Statements. Bravo, Commissioners, Bravo. There they go again, always endeavoring, as members of The Powers That Be, to preserve The Dark Ages for life insurance consumers. Life Insurance Consumers of the World Unite. You have nothing to lose but an abusive industry. All readers should request information on their cash-value policies so that they can evaluate their financial performance. To pay another annual premium without truly understanding your cash-value policy’s performance might otherwise be deemed a little masochistic. You’re certainly not a masochistic, are you? I didn’t think so.


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Brian Fechtel, CFA, Agent


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