Evaluating The Policies

Evaluating the Policies

Term policies from different companies can usually be compared relatively easily. You are paying a certain amount for a defined death benefit for a specified number of years. As long as the features which are included in the policies are identical, a true premium comparison will provide you with the most cost efficient life insurance policy.

On the other hand, whole life policies which are exactly identical in premium, stated death benefits and other options could be substantially different in many other ways. Insurance companies must use certain assumptions, guarantees and projections in valuing their policies. These variables could greatly affect the cost and level of coverage for the policy and include:
• Surrender charges. The amount the company will charge if the policy is terminated.

• Cash value projections. Shows whether the cash value will be sufficient to keep the policy in force in later years. These projections are based upon a guaranteed rate of return and a projected (higher) rate of return. It is essential that these rates be reasonable.

• Policy loans. Do the illustrations use policy loans to fund premiums in some years?

• Dividends. Ensure that the dividends which the company is projecting are in line with what the company has typically paid in the past.

• Mortality assumptions. Each insurance company uses its own statistical analyses to determine the risk of an individual dying at a point in time while the policy is in place. For this reason, some insurance companies are willing to price their product differently than others by assuming a more aggressive mortality factor.

The insurance company and their stability should be considered in evaluating any policy. A life insurance company whose financial stability is in question may need to price policies below that of their competitors. Several independent companies provide life insurance company ratings. The most well known rating companies are A.M. Best Company, Moody’s Investors Service and Standard and Poor’s Corporation.

Above all else, ask questions. Many of the answers will not be spelled out for the insured and others may be subject to interpretation. Life insurance is a very complex product and, yet, is essential for many individuals in order to protect their loved ones or meet the other needs for which it is being purchased.