Why that participating whole life illustration keeps me up at night.

Why that participating whole life illustration keeps me up at night.

Participating whole life is commonly referred to as a black box; you can’t see into it to evaluate the moving parts.  The performance factors are so intertwined that you cannot separate the components to really measure the future performance with realistic expectations.  But it certainly isn’t sold that way!

Who would buy Participating Whole Life if they knew…

  1. We cannot accurately measure future performance
  2. “historical dividends” cannot be relied on for any indication of future performance. In fact the mechanisms of the product design will ensure that downward pressure is reflected in dividend rates for a long time to come (mathematical fact, not assumption).
  3. The guarantees are very low. No one would buy based on those guarantees, but you likely haven’t been shown those. The market risk is all on the policy owner, not the insurance company.
  4. The numbers being shown are completely fictitious, guaranteed not to come true
  5. The dividends being sold are not at all like the dividends you commonly understand
  6. The insurance component is in reverse proportion to typical insurance needs
  7. The mechanics of these products limit the ability to achieve tax effective structures that are available with alternative Universal Life products.
  8. You have no control over the investment options
  9. The cash value doesn’t equal the deposits made typically for 15 or 20 years. What kind of investment is that? (but you have the insurance… expensive insurance, yes)
  10. On every deposit there is a 2% front end load to pay the provincial (premium) tax and maybe another 1% reduction in the yield for federal IIT. NCPI is eroding the cost base.  Are those numbers anywhere in your comparison to alternatives?  I’ll bet not.

Is it the greatest financial hoax since the beginning of time?… the over-promotion, the fictitious numbers, the misleading dividend narrative.

These products are surprisingly sensitive to reductions in dividend scale. About 70% of the result is based on investment component,  30% based on “other factors” (mortality and lapse predominantly).    None of these factors are within your control but the risk of any one of them negatively affecting performance is assumed by the policy owner (in most cases).  The insurance company assumes very little risk… they will only pay dividends on the end performance.  As per the CONTRACT NOT the ILLUSTRATION.

The need vs death benefit is inverse.  Your greatest “need” to protect your income happens when you are young…. but that’s when the insurance component of these plans is lowest.   The death benefit increases as you get older and your “need” is less.  Again, you would be much better off with Term and/or a smaller simple Permanent policy.  And if you haven’t identified a need for insurance in later years, buy term and invest the difference… a much better outcome.

People get all juiced about the cash value after life expectancy, but the reality is that anything you could invest in also has that same long term performance opportunity.

Having said all of that, I also recognize the potential opportunity. There are no other investments that combine Life Insurance with the build up of cash that is not subject to annual taxation. Over the long term it has the potential to provide extraordinary results.  And for anyone who is able to stay in the game for the long term, they will benefit from those who choose to cash in early.

The truth is I have no idea where dividend rates will go in the long term… but neither does anyone else.

So why does it keep me up at night?  Because you need all of the information (not just the upside), to make a properly informed decision. And then it’s a process that has to be managed and measured, and you can’t manage what you don’t know.