Speaker 1 (00:07):
Hello, I’m Bill bma, founder and president of OC Consulting Group. Today I wanna talk about life insurance crediting rates. If I hear another policy owner touting the rate of return he’s getting on his policy cash value, I might scream. Few policy owners have any idea what they’re talking about. All they’re saying is what the agent told them, and they haven’t even taken out a calculator to check the numbers. They don’t even know how it works. Let’s look at a recently run traditional mutual whole life policy presented to me. The carrier’s a big name and respected company with a current dividend rate at better than 6%. The internal rate of return on the premium to cash value at 10 years is negative 3.2%. At 15 years, it’s about zero. At 25 years or age 70, it’s 3.5%. It never hits four. There’s nothing wrong with this and it’s a perfectly fine policy.
However, don’t tell me you’re getting 6% on your cash value because you’re not. That’s not even how whole life works. The cash value, let alone, your premiums just doesn’t grow at the state of dividend rate. I mean, seriously, where do you think the expenses are paid from? Of course, not everyone thinks this, and not every, or even most agents misrepresented, but enough due that it needs to be talked about. Let’s look at an indexed universal life policy that recently came across my desk. Policy owners seem to think they’re getting the crediting rate on index policies even more than whole life policies. This ledger shows an annual premium for 15 years of just over a hundred thousand dollars. The expenses in the first 15 years are just over $500,000. Clearly, that’s gonna be a bit of a strain on the cash value. After expenses, only a portion of the premium will become a part of the cash value that will be credited relative to the performance of the index.
In a down year that advertise 0% floor of an index policy might seem nice, but the policy expenses could not care less about this. They’re still going to eat into the cash value, so it will go down 0% floor or not. By age 85, the cumulative policy expenses are almost a million dollars, and just by age 92, they’re over a million and a half. Again, this is how it works and there’s nothing wrong with it. But when this kind of money starts coming out of a policy and expenses, it might be a good idea to understand what they are, how they affect the policy, and what the real rate of return is. But at least the policy owner can compare dividends and crediting rates between policies and insurance companies and come away with an idea of who’s doing a better job with investments in managing expenses.
Right? Not a a chance in a heartbeat. I could run numbers with competing companies where one has a meaningfully greater dividend crediting rate than the other, but chose cash values that have almost no correlation. If policies that have positive dividend rates, crediting rates and market returns year in and year out can fail and fall off the books with no value even after all the planned premiums were paid, how could anyone think that the promoted rates mean much of anything? Think of it this way. If I offered you an investment that guaranteed 5% and I charged you 6% for it, where do you think you’d end up? And on that downward slide, would you be crowing to your friends about getting 5% guaranteed? What’s the point of all this? Urge your clients to basically forget about the sales and marketing nonsense about crediting and to find someone to help ’em dig a lot deeper into what really matters. That will be the real return. Thanks for your time, and as always, please be in touch with questions or let us know if we can do anything for you. Have a good day.