What is a Blended Whole Life Insurance Policy?

It is amazing how many people do not understand the life insurance product they own.  I do not blame the consumer, rather, I blame the advisor who didn’t explain it well enough.  Everyone understands what term insurance is, although most people do not understand that it is not a viable option after the term period, and everyone understands their group term benefits not everyone understands their permanent life insurance which may be a bit more complicated.

While I clearly am a fan of whole life insurance, I can appreciate that not everyone is, and the debate as to whether one should actually own or not own whole life insurance is better suited on another post.  The type of insurance policy you are buying is an important decision.  For the purpose of this post.  I am interested in just explaining why someone would purchase a blended whole life insurance product, and how the product works on a very basic level.

What Is a Blended Whole Life Insurance Policy?

What Is Pure Whole Life Insurance?

To understand what a blended whole life insurance policy is, you have to understand the basics of a whole life insurance policy. Unlike a term insurance product, a whole life insurance policy has both a living benefit portion usually referred to as a cash surrender value and a permanent death benefit.  If you purchase from a reputable mutual life insurance company you are likely to receive a dividend based on your ownership which is likely to grow both your cash surrender value and death benefit.  Many mutual companies have been around for 100+ years.

Opponents of whole life insurance often point out that it is a smarter decision to buy term and invest the difference.  Honestly, it is not a bad argument.  My problem is that it is way too simplified.  Personally, I know the amount of cash value I have already accumulated would not be added in whole to my investments (and my savings rate destroys the national average).

A Whole Life Insurance Example

Let’s take a look at an actual example from a 35-year-old male in good health from a triple-A-rated company that has been around for a very, very, long time:

As you can see your cash value is increasing along with death benefits.  This is happening because the policy is paying out a dividend and that is being reinvested into smaller paid-up policies which again pay a dividend.  Think of it like compounding inside a mutual fund or dividend-paying stock.

What Does It Mean to Blend a Whole Life Insurance Policy?

The cost of whole-life insurance is not cheap.  I mean an equivalent term policy would be a tenth of the quoted amount above.  At some point life insurance companies must have started to realize they were in a battle they were losing…so the blended life insurance policy was invented.  Every major company has a variation of the blended policy and it may have a different name, but they all work in a similar fashion.

A blended policy is part whole life insurance as shown above and part term policy.  The dividends that usually grow cash value and death benefit as in the example above pay partly for the ongoing term portion as well as to buy small paid-up policies that also give off dividends.  I think the best way to illustrate this is with an example.

So if we were to compare the two pictures:

Clearly, I won’t ever be hired to do graphic design work.  Notwithstanding my lack of talent, what the pictures are trying to illustrate is that the blended policy allows terms to be used to lower the cost (as you will see below).  Eventually, the dividends will pay off the term portion and the policy will cross over and be a pure whole-life policy.

Let’s use our 35-year-old again in good health.  I am going to use the same death benefit of $500,000 but it will be blended “50-50” so that means 50% of it will be a pure whole life product and 50% of it will be a term product, to begin with.

As you can see we reduced the premium but we also reduced the growth of the policy.  I also included a column that illustrates the terminal portion.  Once the term is all paid off, the policy has crossed over and is pure their whole life.

This policy would change dramatically if the dividend of the company changed.  If you take a 30,000-foot view this makes sense.  The dividends are what is paying the term (and “investing” the remainder into small paid-up policies).

Why Would You Purchase a Blended Whole Life Insurance Product?

The main reason would be to provide a permanent policy with a reduced cost.  In the particular situation above the insured was able to get a whole-life policy at a 40% reduction.  The cross-over date and blend can be changed (see warnings below) so that savings could actually be more (or less).  In addition to cost, there are advanced reasons like trying to avoid a Modified Endowment Contract, but that is beyond the scope of this post. Here is an in-depth guide to understanding Modified Endowment Contracts, if you’re interested in learning more.

Warnings When Purchasing a Blended Whole Life Insurance Policy

This post is all about understanding the type of life insurance policy you are buying, and in line with that goal, there are some basic things you should understand about the blended policy you are being sold.

What Are the Financials of the Issuing Life Insurance Company?

As I stated above, the policy is driven by the dividend of the underlying company…so if you are buying one of these types of products with an underlying company that is likely to drop the dividend then your cross-over date will be pushed back, or worse, more money will be necessary to uphold the policy.

What Is the Blend?

I illustrated a 50-50 scenario, but there are less than agents that are willing to go deep and show 25-75 where you are even more reliant on the dividend.  So the deeper you go in the blend the less stable the underlying policy.  There is a great mutual company that sells 10-90 blends for some reason.  It seems very risky with little upside for the insured, since it is likely never to grow any conceivable cash value.

What Happens IF There Is a Dividend Drop?

Any company can provide you with an alternative scenario that illustrates a drop in the dividend.  The purchaser should know what type of risk they are taking.

Do you own one of these policies?