Dividend Crediting-Portfolio Method - Part 2

Understand that the further into the future you compound the difference in illustrations, and the higher the return as assumed the larger the deviation from the truth.

The bottom line is that you cannot depend upon illustrations to compare policies. In a forecasting situation, the illustration game of "Look at how much money you will have!" is a game in which the biggest liar wins. The most valuable function of illustrations is to help you identify and quantify expenses. You must determine if these expenses in the relatively early years of the policy are acceptable to you based upon your personal situation. Since dividends can and will change depending upon what happens in the future, it is not possible that your policy will perform as illustrated.

At this point you might ask, "So what can I depend on?" My advice is to depend on your common sense and what may be referred to as economic gravity. Economic gravity presumes that investments will tend to do in the future what they have done over the period of recorded history. Keep in mind that past performance does not necessarily predict future results. We have little else to go on. For historic returns, it is a good idea to consult Ibbotson Associates' Yearbook on Stocks, Bonds, Bills and Inflation.

This book shows that bonds have tended to provide an average annual return between 5 and 6 percent, or 2 to 2.5 percent more than inflation (which has averaged 3.1 percent). To expect bonds to do differently over the long term is to expect history to change. The economic gravity theory assumes that investment returns will vary, but tend to return to their historic norms. On the basis of common sense, you could assume that the investments within your whole life policy will not defy economic gravity, and if they attempt to do so, the company could end up failing.

Whole life insurance will retain its viability as a way of paying for life insurance protection because of the relative stability of returns and the fact that it is an old, familiar product. Furthermore, some insurance companies are using various strategies to enhance the rate of return. For example, some companies are offering dividend addition riders. The company constructs a paid-up additional life insurance policy that offers maximum cash value and the lowest possible amount at risk. The objective is to provide a greater return on that supplemental additional investment.

This can be accomplished because less of the rate of return on the cash value of this small additional policy must be used to cover mortality and expense charges, so the rate of return within the policy as a whole is enhanced. Companies can also enter into special compensation contracts with sales representatives to defer the receipt of commissions in order to enhance front-end investment returns in policies.