Questionable conclusions. (Comment).

Messrs. Carson and Forster conclude from their research into universal life and whole life that over five- and 10-year periods since issue in 1988, universal life has higher yields than whole life ("Anticipating the Benefits," January 2002). If that were all, this letter would be unnecessary. Unfortunately, they leave the clear implication that universal life is better: "About $80 billion is allocated to ordinary life insurance purchases each year, suggesting the paramount importance of understanding existing differences in policy yields between whole life and universal life," they wrote. They know better than to leave this advice unqualified.

In a service I run for the Consumer Federation of America, I evaluate cash-value policies--several thousand in recent years. I use a similar yield method. From this work, I have stated publicly that the advantage of whole life over universal life is substantial and increasing. Who is wrong? In fact, my observations clash with the authors' only if neither of us gives the whole story.

Although I have not vetted the authors' work, their conclusions do not surprise me. In 1988, Moody's Corporate Bond Averages were about 10%. Universal life current interest rates were probably about 9%. It is my contention that universal life insurers were "cheating" at the time, illustrating rates higher than their normal spreads would suggest, in order to lure new customers. As assets under universal life management have increased, current interest rates have dropped abruptly and now average less than 6%; I've seen some at less than 5%. Whole life dividend interest rates, particularly if weighted by premium volume of each life insurer, probably average more than 7%. The largest individual policy life insurer credits 8.6% to loan-free policies in 2002. Regardless of the precision of these estimates, when I analyze prospective returns on existing policies, whole life looks far better. I am confident that when and if 20-year studies are done by the authors, they will find their results reversed.

The authors engage in financial planning, and I'm sure they would agree that if someone needs insurance for five or 10 years, term insurance is far preferred. With some (usually low-load) exceptions, either universal life or whole life has relatively low returns unless held at least 20 years, preferably until death (for tax reasons). The authors ought to have qualified their conclusions by stating, at the least, that they are limited to the observation periods studied and should not be extrapolated to longer holding periods.

They might also have done a study of prospective yields on current issues of universal life and whole life. Were they to do this, should not premiums and death benefits for each be similar? The authors used universal life Option A (level) with level premiums, but traditional whole life has either rising death benefits (dividends reinvested) or decreasing premiums (dividends in cash or to reduce premiums). I suspect one reason for the study results is that commissions for whole life were higher in dollars due to higher whole life premiums per $1,000 of face amount. A better study would have been to compare "economatic" whole life policies (level premiums, level death benefits) to universal life Option A using comparable premiums.

The Consumer Federation of America currently urges prospective buyers of cash-value policies to avoid universal life. This is not to say that we recommend our readers buy whole life at full commissions.

James H. Hunt

Life Actuary 

Consumer Federation of America

Washington, D.C.