IT’S ALL ABOUT THE MONEY-GROWTH IN LIFE INSURANCE POLICIES
Welcome back to LiST’s life insurance blog.
Last week we discussed which basic information appears on the annual statements and got a general understanding how permanent life insurance works. Now that we know what the death benefit is, and that the policy is split into a cash and insurance component, we will dig down into how the cash component increases (or decreases).
First, payments are made to the carrier by the insured. These payments are called premiums and can generally be made at different intervals (monthly/quarterly/semi annually or annually). Certain policies require a minimum premium to be made (more about this later), but most policies are flexible, and the premium amount can vary.
The premiums paid into the policy over its lifetime (from inception to death-just like people) may appear in the annual statement, such as here:
Or alternatively, may only be available in a separate document- the premium history, which looks like this:
Money comes in, but money also goes out. Policies have many fees (some of which are hidden), and we will discuss them in our next blog. After the fees are deducted, the remaining amount of premium payment less fees, plus the cash value from previous years, will start earning cash in one of the following ways:
- Earn a specific interest rate (“Classic UL”). These interest rates were at around 5% in the early 90’s, 4% at the turn of the century, and have been decreasing ever since. Today it is common to see a 1-2% interest rate on new policies. Many policies have a guaranteed rate, that the carrier may not go below, and a non-guaranteed crediting rate, which could be higher than the guaranteed, but could change in the future.
- Other policies are called Indexed UL policies, which generally allow the savings portion to be placed in an indexed account, that has maximum and minimum caps.
- Yet another type of UL policies are called “Variable UL”, which allows you to put the savings account into accounts made up of investment funds (with higher potential benefits (generally no cap) and greater risk (your cash value can go down the drain).
- There are also other types of policies (such as Guaranteed UL), that we will discuss in later blogs.
This interest/investment amount is added to the cash value of the policy, and can be seen here:
The premium payment information is very important and should be marked and filed. It can impact whether your client meets the taxman if they choose to discontinue their policy.
Join us again next week.
Join us again next week!
The contents do not constitute legal advice, are not intended to be a substitute for legal advice and should not be relied upon as such. You should seek legal advice or other professional advice in relation to any particular matters you or your organization may have.