Whole Life Insurance - Part 2
Most life insurance policies in the United
States that were issued prior to 1977 and that involve savings or
investment are whole life-type policies.
However, they may have
different labels: family plan, 20-pay life plan, life paid up at
age 65, endowment plan, or some other name referring
to a particular policy feature. The name may be related to the fact
that the premium-payment period has been adjusted to
something less than the whole of the insured's life.
The shortened premium payment period is achieved by
increasing the level premium so that the required
amount of money is collected over a shorter period
of time by the time the insured is age 65 rather
than for the "whole of life' which is when the
insured is age 100. The dollars entering these whole
life policies that are in excess of funds required
for the current year's mortality and expenses are
invested in the insurance company's general
portfolio.
It is safe to say that the general portfolio of a
life insurance company primarily is composed of
long-term bonds and mortgages, as dictated by the
various state insurance laws. However, during the
1980s it became evident that there could be rather
different risk-reward relationships in insurance
company general portfolio management.
In the Baldwin
United Insurance company fiasco of 1983, for
example, it was found that Baldwin United was
illegally investing in the stock of its own
subsidiaries. In 19861987, the state of New York
found problems with Executive Life in regard to the
quality of its bond portfolio and the reinsurance
arrangements it was using to eliminate liabilities
from its books In
June 1987,
New
York mandated
that insurance companies
licensed to do business in that state must not
include more than 20 percent of "less than
investment grade" bonds Gunk bonds) in their general
portfolios.
At that time, it was reported that
Executive Life
of
New York's
portfolio contained some 57 percent of this
type bond. The rest is history. Executive Life
failed and was taken over by the state insurance
commissioner. Those people who shopped for life
insurance and made their decision based upon which
company illustrated the highest return learned about
risk. They found out why they should have
settled for a more realistic but possibly lower
value on the illustration and should have opted for
a better run insurance company.
In
April 1991 when Executive Life failed, the
insurance commissioner of the state of California,
John Garamendi, was named conservator of the
company. The
case
was still winding through the legal
system in 1994 while 337,000 policy owners were
waiting to find out what value their policies might
eventually have. There are no guarantees; there are
only guarantors. The guarantees are only as good as
the company behind them!
The fact is that there are variations in the quality
of insurance company general account portfolios. The
risk of the investments and the return on the
investments also will vary from company to company.
Company selection is very important. The ratings
provided by the various rating services and the
risk-based capital ratings stipulated by the
regulators are important, but they are not
everything! You will want to look at the quality and
the integrity of the company, the availability of
useful products, and the quality
of
management.
Whole Life Insurance - Part 2