Which Cash Value Life Insurance Policy Is Better? How To Compare

When considering the purchase of permanent life insurance (i.e. whole life insurance, universal), what methods should consumers use as a basis for comparison? Because permanent life insurance creates equity, one cannot look at the initial premium cost alone. Because whole life insurance, offered primarily by mutual insurers, and universal life insurance, offered primarily through stock insurers, create cash value in different ways, looking at whose cash value is higher ‘in a vacuum’ is also not advised. So how can you compare easily?

(1) Let the Agent do the work
One option is to tell the agent you’re working with to create illustrations (projections of values) by eliminating all but one variable.

Ask them to have each company’s product illustration have the same premium figure paid for the same period of time. Pick a point in the future and see which cash value is higher. If all of the other variables are the same (i.e. underwriting class, interest or dividend rate, face amount), the policy that generates the higher cash value is the more competitive contract

Cash Value
Ask the agent to solve for a desired income stream or cash value accumulation at a specified point in time (i.e. a certain age). For example, tell the agent you want to see policies that can generate $500,000 of cash value at age 70 with the same death benefit and same underwriting class. The computer systems can do this. If all other variables are the same, the policy with the lower premium is more competitive.

The disadvantage of having the agent run these ‘special requests’ is that you’re probably tipping them that you’re ‘shopping the market’ and, therefore, they may become defensive and try to talk you out of something that you want to do. However, if a trusting relationship has been established, they shouldn’t have an issue with this type of request.

(2) Internal Rate of Return (IRR)
Ask the agent to include the IRR report on the life insurance quotes. The internal rate of return on either cash value or death benefit, simply shows a rate of return on the premium dollars spent. At any point in time, the IRR report will show a percentage rate of return (i.e. 5%) on the ratio of premium spent to cash value accumulated or premium spent to death benefit. Asking for the IRR report will show that you’re concerned about performance, and not necessarily shopping. The policy with the greater IRR is the more competitive contract.

Once you’ve determined the competitiveness of the insurance policy you’re considering, there are other factors to consider before determining the best value. First, and foremost, is how is the IRR generated…on a guaranteed or non-guaranteed basis. If policy ‘A’ has an IRR of 3.5 on a guaranteed basis and policy ‘B’ has an IRR of 4.25% on a non-guaranteed basis which do you choose? Next is the strength of the company. Finally, is the relationship (or lack thereof) you want to have with an agent.

All of these factors should go into determining which policy and product is the best value for you.