Preneed 402b: How to Compare Apples With Apples: Insurance Products

Having addressed, last week, assumptive fallacies let’s look at the actual mechanics of comparing products.

Here is an apples to apples comparison of 4 products from 3 of the 4 companies I would be willing to work with.  CLICK ON THE IMAGE TO SEE IT IN FULL SCALE.

Notice that for each product the Prearrangement Amount remains the same.   The Prearrangement amount is always your apple or common denominator.  Each product has the following growth factors.

  • Product A is 2.7% Compounded
  • Product B is an age dependent Simple Growth Factor
  • Product C is 3.0% Simple
  • Product D is 2.5% compounded.

There are 4 variables that all need to be part of any analysis and they are:

  • Prearrangement Amount
  • Face Value at Issue or Bumpup
  • Commissions, marketing allowances and other immediate cash benefits
  • Growth
All of these need to be incorporated to understand what value you are actually receiving.  Having done this kind of analysis for years I observe that many products look good on the surface but simply take your money and give SOME of it back to you later.
The Common Denominator
We all remember that comparison of any kind requires a common denominator.  This is your apple.  Last week I pointed out that you should never depend on averages for this purpose.  Instead, I require my clients to provide me a minimum of 60 policies.  They frequently provide me with an entire year’s production.  The common denominator in all product comparisons should be the prearrangement amount of the sale.  The prearrangement amount is the total contract amount being funded.  This may or may not include cash advances and sales tax.  In this example it is the first line ($1,208,734.79)
This is too much information
I realize that this chart contains a lot of data.  So, let me clue you in on where I put my emphasis.
Any credible analyst will tell you that a dollar today is worth more than a dollar tomorrow.  That is why I calculate the True Economic Value.  The higher that value in the beginning years the better.  In this example this points me to product B.  You will note that in the growth section the balance is declining.  This is because I incorporate a mortality estimate for the first 5 and 10 years.  This gives me an estimate of the remaining balance in force and that balance is what you see in  years 5 and 10.  Here Product B is lower in dollar value at year 10.  For many this might be a cause for concern because of anticipated shortfalls.  But focusing on future dollars and ignoring current dollars is another reason I calculate the true economic value.  The True economic value for product B in year 10 is still strong in spite of the lower dollar balance.  Since more deaths occur in the early years of a block this means that Product B will offset the risk of shortfalls by stronger growth in earlier years which is more valuable to me than later years.

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