From the Desk of Guy Baker: Demystifying Life Insurance -- Question #3

Many people find life insurance to be very complex. They are mystified by how insurance is structured, how the varied options inside the contract work, and how the pricing algorithms are determined. Additionally, most people prefer to avoid discussing their demise, and the complexity makes the conversation even more off-putting. However, protecting one's family, business, or employer is a subject that is too important to ignore because of discomfort.?

So, to keep the discussion simple, whether considering term insurance, whole life, universal life, indexed life, or variable life, four fundamental questions will always exist:?

1.???? If I plan to buy insurance, how much should I buy?

2.???? What is the right policy for me? (Term, whole life, universal life, variable?)

3.???? What will it cost now and in the future?

4.???? How long should I plan to keep my insurance?

Here is the discussion on question #3.

3. What will my insurance cost?

Three factors hard-wire into a life insurance contract: (a)?mortality costs?(i.e., the cost of insurance), (b)?administration expenses,?and (c)?investment return. So, it is unsurprising that the insurance cost is very similar across all carriers who are all using the same mortality tables (i.e., probability of death table), and by law, every insurance company must use the Commissioners Standard Ordinary table for the guaranteed mortality costs. They can adjust this cost with their own underwriting experience. However, these costs are nearly the same across carriers because mortality is a science. Some insurers are more efficient than others, but the administration costs are a small part of the total insurance cost.

Regarding investment returns, even though some insurers may be better investors than others, the company's general account is limited in how it can invest. It is basically limited to corporate bonds, government securities, real estate, mortgages, and stocks. The government regulations are very specific about how much a carrier can put into each category. So, regulatory constraints limit the ability of one company to outperform another over time by any significant amount. When it comes to index universal life, companies do not control returns. The returns are a function of the investment index selected by the insurance owner.

Discussion on questions #1 and #2 were published on 3/21/2024 and 3/28/2024, respectively. Watch for a discussion on question #4 with next week's article -- Guy