MDRT President Guy E. Baker, CLU, MSFS Tuesday, March 16, 2010
People die according to a predictable pattern of death. This is often referred to as a mortality table and it results in a geometric curve that increases as one ages. By summing the cost of dying year-to-year, you are able to calculate the cumulative cost of insurance until death. The mortality curve has to be the same for all insurance carriers because life insurance is based on actuarial science. All carriers use the same basic actuarial tables and rely on the same math. Mathematics is not an opinion and with large sets of numbers, the predictability is quite accurate.
All insurance is term insurance. Let’s start with that fact. Whether a client buys term, universal or whole life, the predictable pattern of death must be the same. The only difference is how much of the actual mortality cost will be paid out of pocket compared to using investment returns to offset the cost of the coverage – how the client does this is a choice. The client can either pay the cost of dying (the mortality costs) with their money (by paying the mortality curve directly) or with tax-free compound growth earned on the cash values of the policy. (This is done by filling what I refer to as the “Box”, the cash values of a life insurance policy.). But, in the final analysis, the insurance company must collect the same amount of mortality premium to remain financially solvent.
The choice is simple. Your client can either pay the curve or fill the “Box.” If they elect to fill the “Box,” then the amount credited to the “Box” will vary according to investment options elected. If the returns are higher than illustrated, the “Box” will need lower contributions to achieve the goal. But, if investment returns decline, the “Box” will require more money. In the final analysis, all insurance is term insurance. The only way to make it permanent is to fill the “Box” and let the cash values fund the mortality costs in later years.
Tont Melsi Thursday, May 6, 2010Dear President Baker,
Thanks for your gracious response. I do think this is a great way to present some of the differences, however some others took us a bit to critically and need to review with their actuaries.
When a whole life policy endows at the end of the mortality table there is certainty of payment (tax free to boot!) of the face amount plus additions. That is not true with term because it ends at that point and there is no reserve. This is true if all payments, however accomplished, are made throughout the life of the contract.
Most actuaries would also tell you that the mortality cost in most term policies are higher than charged to quality whole life policies. That a charge for "anti-selection" on the conversion rights are built in to term, with wl it is not necessary in that it is already permanent. If anything this makes your presentation even stronger and I have used it quite successfully with clients as well! (That's the MDRT Way - right)
Thanks for providing this forum,
"Caveman"Tony Melsi, CLU,ChFC, 26 year MDRT Member
READER COMMENTS
Don Jordan Monday, May 3, 2010Guy: An outstanding presentation! Having been in the business for 56 years I am aware of the many ways of looking at term and permanent life insurance. I do not understand how Tony Melsi can differ with your analysis. Whole life will only pay off if the premiums required are paid. Although it is designed to endow, we can also say it is "designed" to expire if the whole life premiums aren't paid in cash or by loan, as long as the cash values cover the term and expense costs and company profit.
Term insurance is not designed to expire, unless it is limited in it's term period; however, if buying term, I would think the intelligent person wants the right to convert to permanent or continue the term until he/she "expires" (dies) by paying the increasing costs as they come due.
Your explanation is by far the most understandable for communicating the difference between life insurance that is scheduled to NOT be in force when you die to whole life which puts you in control of having the insurance in force when you do die.
Congratulations on your success in the field and your election to the presidency of the MDRT.
I had the pleasure of meeting you many years ago as we were both waiting for a plane after a MDRT convention.
Best regards,
Don Jordan
READER COMMENTS
Terry Colbert Friday, April 23, 2010Guy,
Once again, congratulations and thank you for serving our industry as certainly one of the most "financially literate" and articulate Presidents in MDRT history!
I use the Box concept on a regular basis. Every since I obtained copies of the materials and handouts from your booth many years ago, it made the explanation of permanent insurance SO SIMPLE that "even I" could explain it to a cave man!
Terry Colbert, CLU Kansas City 31 year member
READER COMMENTS
Guy Baker Thursday, April 8, 2010Tony, you are right, in the sense term expires. The point I try to make to clients is the mortality costs are the same for term versus whole life or universal life over the long run. There may be some actuarial machinations in the early years, but ultimately, because life insurance is a mathematical science, all policies have to collect the same amount of mortality costs at LE and beyond. If not, the industry would go broke.
Once a buyer understands that term and the mortality costs in permanent policies are the same, the only question is who pays the mortality costs - the buyer or is it paid with compound earnings inside the policy?
The certainty of payment is less the cost of mortality. So it is a business decision. Whose money is cheaper? Mine (the insurance company) or yours (the buyer)? Every analysis I have ever seen says that if you use comparable risk investments - insurance company dollars will always be cheaper than if you pay the mortality costs from your pocket.
Let me know what you think.
READER COMMENTS
Anthony M. Melsi Sunday, March 21, 2010Dear President Baker,
Great article. Although I agree that whole life policies have a similar internal curve "risk element", they are not term insurance. As you know term insurance ultimately expires because there is no money in the "box" whereas whole life is designed to "endow". It provides certainty of payment....very different than term....
Your thoughts on presenting this?
Sincerely, Tony Melsi
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