Search for the best life insurance companies and you'll get a stack of top 10 lists. On LIFE Pod Ep 92, James and Carlo Viqueira went through what they actually check before recommending a carrier for high cash value life insurance, whether the policy is whole life or an indexed universal life policy, or IUL. The names that come to mind first when you think of life insurance may not be the ones you should be looking at. They landed on five checks.
The first is financial strength. Every guarantee in a policy, whether it's the death benefit, the cash value, or your access to the cash value, depends on the company being able to pay it. Insurance companies don't fail often, but it does happen. Ratings measure this. Carlo mentioned the Comdex score and Moody's ratings, and you can look either one up for any carrier on an illustration you've been handed.
On the whole life side, James also looks for a mutual company. That means the company is owned by its participating policy owners, so when you buy a policy you become a part owner and share in the dividends. A dividend is the part of the company's earnings it pays back to those owners. At a stock company, the earnings get split with shareholders too. The whole life carriers James and Carlo work with have paid dividends for more than 100 years. Dividends aren't guaranteed, but a long record of paying them tells you something about the company behind them.
Watch out for the term mutual holding company. It sounds the same and it isn't. James explained that a mutual holding company could be 49% owned by a stock company, with 51% still held by the original mutual. On paper the policy owners are in control, but getting enough of them to vote together against that other 49% is a long shot, and a stock company only buys in to get a piece of the earnings. James also sees it as one possible step toward demutualizing, meaning converting to a stock company. That doesn't mean it will happen soon. But he said a lot of carriers that demutualized ended up walling off their older policies and paying just the guarantees, because they now had stockholders to answer to.
For an IUL, the mutual question doesn't matter. An IUL owner isn't a part owner of the company and doesn't share in dividends, so a mutual carrier has no reason to treat its IUL owners the way it treats its whole life owners. What Carlo keeps an eye on instead is a carrier that brings out a new IUL product every year or so. That isn't a deal breaker, but it can be a sign the carrier is changing things to make the numbers look better. James added that it also makes the agent's job harder, because keeping track of small differences between a long list of products targeted at different groups leaves more room for a mismatch. They don't need that level of complexity to get a strong product.
The second check is policy design, and the way James compares it across carriers is the internal rate of return, or IRR. That's the yearly return your cash value actually earns once the policy's expenses come out. The IRR reflects the current dividend rate on whole life, or the assumed rate on an IUL, minus the expenses. The useful part: if you run a whole life illustration at a dividend rate half a point lower, or a full point lower, the IRR drops by that same half point or full point. What's left over is the expense. So you can see that one company's expenses run about a certain amount while another's run twice that, or three quarters of it. James pointed out that by the time they're comparing designs, they've already narrowed the field to the financially strongest companies, so design only gets compared among carriers that passed the first check.
The third is flexibility, which mostly applies to whole life, since an IUL is a flexible premium product to begin with. Either way, you want a wide gap between the least you're allowed to put in and the most. You have to meet the minimum every year or the policy can lapse, which means it ends. Among the top whole life companies James works with, one is not like the others. It doesn't let you put money in whenever you want during the year, and it's less forgiving about catching up on paid-up additions you skipped in past years. Paid-up additions are the extra premium dollars that build cash value fastest.
That doesn't rule it out. Carlo noted that some of the less flexible carriers pay strong dividend rates. And James said you can get the flexibility outside the policy. If you have a home equity line of credit, or HELOC, with enough room to cover a full year's premium, you can pay the whole premium from the HELOC and then pay the HELOC back over the course of the year. By the time the next premium is due, you're ready to do it again. How long you want to pay premiums matters here too. Some products are built for different funding periods, and James said they can sometimes take a shorter pay product and set it up to be paid for much longer, with a higher internal rate of return than a product designed for the longer period.
The fourth check is for IULs only: the index options, meaning the accounts your cash value can be credited from. Nearly every carrier offers an S&P 500 option, which makes it the easiest apples-to-apples comparison. Look at its cap, which means the most you can be credited in a year, or its spread, which is the amount taken off the top of the index gain before you're credited. Those numbers show how big an options budget the carrier is working with. The options budget is the money the carrier spends each year on the options that produce your credit. The fixed account rate, the safe rate you can park money at when you're unsure about the market, is tied to that same budget.
The fifth is what it costs to get to your money. On whole life, that starts with direct or non-direct recognition. With direct recognition, the carrier adjusts the dividend on the money you've borrowed against. Carlo said an outside line of credit can help you work around that, and non-direct recognition can be an advantage if you want the most room inside the policy. On an IUL, Carlo looks for a participating index loan, which lets the borrowed money keep getting credited by the index while the loan is out, so borrowing doesn't stop your growth. He called it one of the main things he wants in an IUL. On any policy, ask what the loan rate is, whether it's fixed or variable, and if it's variable, the most they can ever charge you. Policy loans reduce your cash value and death benefit until they're paid back.
One thing that didn't make the list is living benefit riders, the add-ons that let you reach part of the death benefit early for a chronic, terminal, or accidental illness. James puts them at the bottom. Most carriers offer about the same ones. Their biggest advantage comes in the early years, when the death benefit is large compared to what you've paid in, and that's the least likely time you'll need them. By the age when most people can't do two of the six activities of daily living, a policy built for cash value has often had its death benefit reduced to a minimum, and the rider shrinks along with it. A small number of people care a lot about those riders, and for them it can change the decision.
Illustrations are projections, not promises, and James is a licensed insurance broker, not a CPA, attorney, or registered advisor. If an agent has sent you an illustration, look up that carrier's rating, then ask for the internal rate of return report and what the loan rate can rise to before you compare it against anything else.