Actuarial Outpost > Life Permanent life insurance internal costs
 User Name Remember Me? Password
 Register Blogs Wiki FAQ Calendar Search Today's Posts Mark Forums Read
 FlashChat Actuarial Discussion Preliminary Exams CAS/SOA Exams Cyberchat Around the World Suggestions

 Enter your email to subscribe to DW Simpson weekly actuarial job updates. li.signup { display: block; text-align: center; text-size: .8; padding: 0px; margin: 8px; float: left; } Entry Level Casualty Health Life Pension All Jobs

 Thread Tools Display Modes
#21
08-10-2017, 03:10 PM
 elleminopee Member SOA Join Date: Apr 2002 Location: the project Posts: 282

Quote:
 Originally Posted by Mr X Thanks. This makes a lot of sense. I did some quick calcs and noticed the cost goes negative after a certain number of years. Is this normal?
It probably means that the interest "credited" to you on your cash value/reserve is more than the cost (mortality and expense) of the insurance. So you are paying for the insurance by virtue on the interest earnings on prior deposits.
__________________
"A new tree had grown from the stump and its trunk had grown along the ground until it reached a place where there were no wash lines above it. Then it had started to grow towards the sky again. Annie, the fir tree, that the Nolans had cherished with waterings and manurings, had long since sickened and died. But this tree in the yard--this tree that men chopped down...this tree that they built a bonfire around, trying to burn up its stump--this tree had lived!" - Betty Smith, A Tree Grows in Brooklyn
#22
08-11-2017, 11:58 AM
 Mr X Non-Actuary Join Date: Aug 2017 Posts: 11

Quote:
 Originally Posted by elleminopee A concept that is used in a sales setting is to calculate "death benefit IRR". Count each of your premiums as a negative (the investment) and the death benefit as a positive at the end of the stream. Do this for each duration (i.e. calc the DB-IRR assuming you die at the end of year 1, 2, 3, etc). The numbers will start out insanely high, but eventually fall to something that looks pretty normal. The idea is to figure out how long you would have to live before the return was unattractive. You'll have to figure out unattractive vs. what (30-yr bold yield, avg stock market yield, etc). This is a way to compare the return in your policy vs some other financial instrument, so it a cumulative view expressed in terms of return not \$ cost. Just remember the returns for the high death ages don't really reflect the fact that even though you didn't die young, you had protection in case you did. I personally don't see much value in calculating the cost year by year and think you should take a long term view. You can also calculate a cash value-IRR (same concept as above but assume you surrender at the end of each duration instead of die). These numbers will be considerably less attractive. They'll start really low and grow toward a reasonable (but still low) rate of return.
Thanks.

Yeah, I get that IRR on the death benefit and cash values tells me the returns for those.

With that said, I am interested in the costs because it's a way to see what the insurance costs. I mean no one says "don't worry about it" or "it's not important" when buying term insurance or universal life. People look at both cost and return to get a complete picture of what they're buying.

That's what I want.
#23
08-11-2017, 12:28 PM
 MathGeek92 Member Join Date: Jul 2004 Posts: 699

A "cost" from the policyholder perspective is very difficult to describe (IMO).

Lets say a company invests in 50% equities (assume 8% return) and 50% 30 year bonds (assume 5% return). The "total" return earned by the company is 6.5%.

lets say you get a net growth rate of 4% determined by (gain in CSV) / (BOY CSV + Prem)

gain in CSv = EOY CSV - BOY CSV - Prem paid

Would you say you had a 2.5% cost?

that margin of 2.5% is the value translated into a rate for your perspective. What if it was made up like the following:

-3.5% gross interest company margin
+\$5/100 mortality dividend component
+0.5% interest dividend component
-\$75/policy dividend expense

lets say that all nets to 2.5%

How would you translate that cost?

That's kind of the beauty and the pitfalls of WL insurance. the "cash" return is simply the increase in CSV (with dividends paid) - less the premium paid / BOY CSV

The complexity is the insurance costs are all embedded inside that net build up. Your base CSv is guaranteed no matter what. Dividends fluctuate based upon company experience.

Now - in full disclosure - I am not a big fan of permanent insurance. You can never afford enough of it ata young age when you need the most, and if you do buy it, you have way too much insurance at older ages when you really need a lot less.

There are some tax plays, but for the average person, they are much better off buying term and investing more in a ROTH or using tax sheltered strategies. If you ever become "uninsurable" during the term period, simply convert to a permanent at that time. Buy/renew/review your term coverage every 5 to 7 years and adjust as necessary.

Plus if you buy enough of it, you basically get a medical exam for free. If you qualify for super duper term rates, then you know you are pretty healthy. plus it may be motivation for some to maintain a slightly healthy lifestyle knowing you need to keep your weight under control, etc.

As with all free advice you get what you pay for. I'd suggest a thorough financial review and determine why you bought WL in the first place and does it still fit in your financial goals, etc.
#24
08-11-2017, 12:33 PM
 JMO Carol Marler Non-Actuary Join Date: Sep 2001 Location: Back home again in Indiana Studying for Nothing actuarial. Posts: 36,873

Quote:
 Originally Posted by MathGeek92 Now - in full disclosure - I am not a big fan of permanent insurance. You can never afford enough of it ata young age when you need the most, and if you do buy it, you have way too much insurance at older ages when you really need a lot less.
A company I once worked for, in the days before UL, offered a plan that had level premiums and a death benefit that declined. I'm not sure of the exact pattern - say the face amount reduced 50% 10 years after issue and a further 50% at age 65. (Not sold to people over 55 . . .)

Quote:
 There are some tax plays, but for the average person, they are much better off buying term and investing more in a ROTH or using tax sheltered strategies. If you ever become "uninsurable" during the term period, simply convert to a permanent at that time. Buy/renew/review your term coverage every 5 to 7 years and adjust as necessary. Plus if you buy enough of it, you basically get a medical exam for free. If you qualify for super duper term rates, then you know you are pretty healthy. plus it may be motivation for some to maintain a slightly healthy lifestyle knowing you need to keep your weight under control, etc. As with all free advice you get what you pay for. I'd suggest a thorough financial review and determine why you bought WL in the first place and does it still fit in your financial goals, etc.
Interesting comments, especially the last paragraph.
__________________
Carol Marler, "Just My Opinion"

Pluto is no longer a planet and I am no longer an actuary. Please take my opinions as non-actuarial.

My latest favorite quotes, updated Mar 5, 2018.

Spoiler:
I should keep these four permanently.
Quote:
 Originally Posted by rekrap JMO is right
Quote:
 Originally Posted by campbell I agree with JMO.
Quote:
 Originally Posted by Westley And def agree w/ JMO.
Quote:
 Originally Posted by MG This. And everything else JMO wrote.
And this all purpose permanent quote:
Quote:
 Originally Posted by Dr T Non-Fan Yup, it is always someone else's fault.
MORE:
Quote:
 Originally Posted by Sredni Vashtar I feel like ERM is 90% buzzwords, and that the underlying agenda is to make sure at least one of your Corporate Officers is not dumb.
Quote:
 Originally Posted by PeppermintPatty But sometimes you get someone who has that charming mix of "don't care" and "don't get it", and there's just not much you can do.
#25
08-11-2017, 04:12 PM
 Mr X Non-Actuary Join Date: Aug 2017 Posts: 11

Quote:
 Originally Posted by MathGeek92 A "cost" from the policyholder perspective is very difficult to describe (IMO). Lets say a company invests in 50% equities (assume 8% return) and 50% 30 year bonds (assume 5% return). The "total" return earned by the company is 6.5%. lets say you get a net growth rate of 4% determined by (gain in CSV) / (BOY CSV + Prem) gain in CSv = EOY CSV - BOY CSV - Prem paid Would you say you had a 2.5% cost? that margin of 2.5% is the value translated into a rate for your perspective. What if it was made up like the following: -3.5% gross interest company margin +\$5/100 mortality dividend component +0.5% interest dividend component -\$75/policy dividend expense lets say that all nets to 2.5% How would you translate that cost? That's kind of the beauty and the pitfalls of WL insurance. the "cash" return is simply the increase in CSV (with dividends paid) - less the premium paid / BOY CSV The complexity is the insurance costs are all embedded inside that net build up. Your base CSv is guaranteed no matter what. Dividends fluctuate based upon company experience. Now - in full disclosure - I am not a big fan of permanent insurance. You can never afford enough of it ata young age when you need the most, and if you do buy it, you have way too much insurance at older ages when you really need a lot less. There are some tax plays, but for the average person, they are much better off buying term and investing more in a ROTH or using tax sheltered strategies. If you ever become "uninsurable" during the term period, simply convert to a permanent at that time. Buy/renew/review your term coverage every 5 to 7 years and adjust as necessary. Plus if you buy enough of it, you basically get a medical exam for free. If you qualify for super duper term rates, then you know you are pretty healthy. plus it may be motivation for some to maintain a slightly healthy lifestyle knowing you need to keep your weight under control, etc. As with all free advice you get what you pay for. I'd suggest a thorough financial review and determine why you bought WL in the first place and does it still fit in your financial goals, etc.

Appreciate the perspective. This is my question. What is that 2.5% of? Premium? Cash value? Something else? Or is there a better way to tease out those implied term costs inside of a whole life policy?

As far as no need for permanent insurance, that's probably more a philosophical one than a financial or mathematical one. It's just as easy to say no one really *needs* insurance at all, term or otherwise. We buy it because we want to protect something.

Not worried about being "overinsured." I plan on drawing down the CV in retirement which should decrease my death benefit, solving any perceived "over insurance" issue. And if it doesn't happen, my wife and kids will be very comfortable. I was actually able to buy enough whole life to insure myself properly for my age/income.

I did look at whole life vs buy term and invest the difference. Except I started with whole life, figuring out how much insurance I would need and then looked into getting the same DB as the whole life and investing the difference. At the end of the day, whole life made a lot of sense to me, even based on more conservative dividends.

Most of my friends (and my parents) bought term and squandered the difference or lost it in the stock market, with one of my parents losing their savings twice over. So I didn't want to go down that road.

 Thread Tools Display Modes Linear Mode

 Posting Rules You may not post new threads You may not post replies You may not post attachments You may not edit your posts BB code is On Smilies are On [IMG] code is On HTML code is Off

All times are GMT -4. The time now is 02:04 AM.

 -- Default Style - Fluid Width ---- Default Style - Fixed Width ---- Old Default Style ---- Easy on the eyes ---- Smooth Darkness ---- Chestnut ---- Apple-ish Style ---- If Apples were blue ---- If Apples were green ---- If Apples were purple ---- Halloween 2007 ---- B&W ---- Halloween ---- AO Christmas Theme ---- Turkey Day Theme ---- AO 2007 beta ---- 4th Of July Contact Us - Actuarial Outpost - Archive - Privacy Statement - Top

Powered by vBulletin®
Copyright ©2000 - 2018, Jelsoft Enterprises Ltd.
*PLEASE NOTE: Posts are not checked for accuracy, and do not
represent the views of the Actuarial Outpost or its sponsors.
Page generated in 0.33256 seconds with 11 queries