by Zaahirah Souri, LifeTrends Product Analyst
Along with providing a death benefit, most forms of life insurance have the additional benefit of accumulating cash that is accessible to the policyowner. This cash tends to be limited in the early years due to typically higher surrender charges imposed to protect against the surrendering of a policy. Some products offer cash value enhancement riders which waive, minimize, and/or spread the higher early year costs and charges to allow more cash to be available in those early years. These riders are typically used in cases of premium financing where high early cash can be used as a type of collateral for a lender or corporate owned life insurance (COLI) where companies can offset the cost of employee benefits with high early cash values on their balance sheets. With over 40 products that offer this type of rider, how do you know which cash value enhancement riders produce the highest liquidity in the early years of a policy?
We set up a study that budgets $1 million dollars towards a life insurance policy—separated as paying $100,000 for ten years—and looked at the percentage of premium returned to the policy owner if surrendered. The scope of our study showed riders returned between 75% to 105% of premiums throughout early years, with a median of about 90% liquidity. Top performers produced around 95% premium returns or higher in the first five years. About 20% of riders produced specified scheduled outcomes of high early cash and were always among the top performers.
• Lincoln’s Exec Rider returns 100% of premium in the first 10 years – when minimum premium requirements are met (IUL)
• Nationwide’s Conditional Return of Premium rider returns 100% of premiums paid in the first 3 years, 95% in the fourth and 90% in the fifth (IUL)
• Minnesota Life’s Surrender Value Enhancement Agreement combined with Early Values Agreement returns 100% of premiums in up to the first 3 years (UL, IUL and VUL)
• Penn Mutual’s Surrender Benefit Rider returns 100% of premiums paid in first 3 years (IUL)
• Voya’s Early Cash Value Rider returns at least 95% of premiums paid in the first 6 years – when minimum premium requirements are met (IUL)
Other notable riders that consistently return about 95% or higher in the first five years are:
• AXA’s Cash Value Plus (IUL) and Liquidity Rider (VUL)
• Guardian’s Cash Value Enhancement Rider (UL)
• Midland’s Waive Surrender Charges option (IUL)
• Minnesota Life’s Corporate Enhanced Values Agreement (IUL and VUL)
• Prudential’s Enhanced Cash Value (VUL)
The study also revealed two outlier riders that created comparatively low liquidity for certain products—John Hancock’s Cash Value Enhancement Rider for Protection IUL 15, which returned below 70% of premiums paid in each of the first five years, and Voya’s Waiver of Surrender Charge Rider for UL-CV, which created at most 20% liquidity in the first year and reached only about 80% liquidity by the fifth year.
Overall, when looking for a relatively high-performance cash value enhancement rider, a good rule of thumb is to aim for riders that create around 90-95% or greater liquidity in early years.
Note: Some riders also specify whether the rider is designated for use in premium financing or COLI cases; however, there was no clear winner when comparing general-use riders against premium financing-only and COLI-only riders.