The Life Insurance Policy as an Options Package

Abstract

A typical life insurance contract provides a package of options or rights to the policyowner that is not precisely duplicated by any other combination of commonly available contracts. Viewed from this perspective, life insurance enjoys a unique position in the field of investments and should be judged in this light. The paper shows that an options viewpoint provides a more complete explanation of policyowner behavior towards life insurance than the conventional savings-andprotection view. Also, the paper examines the effect of the options viewpoint in restating the amount of insurance protection and discusses implications of the options view for product development and cost disclosure. The persistence of whole life insurance in the United States during the last decade is somewhat a mystery if the product is regarded as a simple package of savings and term insurance. Yields offered by competing investments generally were higher than returns on life insurance cash values, so the failure of many policyholders to surrender their contracts in favor of higher yielding investments is puzzling. Tax advantages of whole life insurance provide a partial explanation, but other investments dominate life insurance if yield and tax advantages are considered together. Municipal bonds have provided similar tax advantages with a higher average yield' while an Individual Retirement Account or a Keogh Plan has offered greater tax advantages with a similar yield.2 Why does whole life insurance continue to exist? This-paper answers this question by offering a new perspective on whole life insurance and other life insurance products. It demonstrates that a life insurance contract is a package

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