John Hancock ups the ante in cash value guarantees

NEW YORK — John Hancock Life Insurance Co. of Boston this month introduced a policy that guarantees cash values to a greater extent than other types of whole life insurance. But some financial advisers need convincing that the product is the best option for clients who want more life insurance guarantees. The policy is intended in part to compete with dividend-paying policies of mutual insurers, according to Naveed Irshad, vice president of product management for John Hancock, a stockholder-owned company. The policy also is a potential alternative to universal life insurance — which offers the possibility of investment returns but doesn’t build substantial cash value. Whole-life policies already have a guaranteed cash value component, which increases based on a policy schedule. Cash value also has a discretionary element — usually dividends or additional investment returns — based on financial performance. The John Hancock policy modifies the discretionary element with what Mr. Irshad called “a guaranteed floor of income.” It costs about 20% more than a comparable universal life policy. There is no similar guaranteed whole-life product out there with a similar price point, Mr. Irshad added. Advisers are willing to explore uses of the new policy, but some question its value and necessity. Guaranteed whole life could cure a weakness — the lack of guarantees — of some investment products in the market, noted Joseph Maczuga, executive director of the Fee Advisors Network in Troy, Mich. But he is unsure whether the guarantee is worth a higher premium. “Some insurers focus on a perceived problem — such as cash value uncertainty — in order to create a higher-priced product,” Mr. Maczuga said. “In whole-life insurance, the underlying investment is the insurer’s bond portfolio, which is unlikely to go down substantially,” said Neal Slafsky, president of Capital Planning Group LLC in Fort Lauderdale, Fla. So he doubts whether the cash value guarantee is necessary. Guaranteed whole life is about half the price of dividend-paying “participating” policies offered by mutual insurers that provide similar death benefits and cash values, Mr. Irshad said. “Also, the dividends of mutual companies aren’t guaranteed, and a guaranteed policy offers more certainty as to cash value,” he added. Although it is true that the premium for a guaranteed whole-life policy generally will be lower than a participating policy with similar benefits, the trade-off is that the guaranteed policy’s cash value is predetermined, said Robert Lehmert, vice president of individual markets for The Guardian Life Insurance Company of America, a New York-based mutual insurer. The guaranteed policy can’t reflect future economic and mortality developments favorable to the policyholder — and doesn’t pay the dividends that a mutual insurer does — which closes the premium gap, he said. Although dividends aren’t guaranteed, Guardian has paid dividends for 139 consecutive years, Mr. Lehmert added. He estimated that the premiums of non-participating policies, such as guaranteed whole life, are 20% to 30% lower than participating policies, less than the 50% estimated by Mr. Irshad. “Our policyholders are already seeing the results of improved mortality in our dividend rate,” said Meridee Maynard, senior vice president of life product for The Northwestern Mutual Life Insurance Co. in Milwaukee. Stock insurers, on the other hand, have to file new rates with state insurance departments in order to lower their premiums to take into account the revised 2001 mortality table, she added. The new John Hancock product’s premiums are based on the revised mortality table. “Flexibility” is the key life insurance concept in 2007, Ms. Maynard said. “People want a product that reacts to their changing needs.” Ms. Maynard questioned whether a guaranteed whole-life product could do that. However, there are situations in which the uncertainty of dividends makes them inferior to an outright guarantee. For instance, guarantees are sometimes needed in personal and commercial situations to meet a financial promise, including business continuity and wealth transfer, Mr. Irshad noted. But some advisers are not convinced. “Clients should buy whole-life insurance from a mutual company so they can get the dividends,” Mr. Slafsky said. With a stock insurer, the dividends go to the shareholders, he added.