It’s Not That Hard
By Bill Boersma
Here’s what I mean: add up the premiums paid over the first 5 or 10 years. Compare that figure to the cash value. If your total premiums paid are less than the cash value, isn’t it obvious that you’re not actually earning the “credited rate” that gets highlighted in illustrations and discussed by the agent?
That’s not necessarily a bad thing, it’s just how life insurance works. These policies are front-loaded with fees, expenses, and taxes, and some costs continue indefinitely. Over time, returns should improve, but please, don’t assume you’re earning the illustrated crediting rate, dividend rate, or market-based return on your premiums. That’s simply not how these products function, nor are they designed to.
If you look at your policy’s ledger down the road, let’s say around year 20, some basic math can reveal a lot. Take the cash value in year 20, subtract the cash value in year 19, and divide the difference by the year 19 cash value. Is that percentage higher or lower than the stated crediting rate?
It could go either way. If it’s lower, there are ongoing costs that reduce your growth, completely normal, but worth understanding. If it’s higher, it means bonuses or other credits are being applied, which you should also understand. Reviewing the expense and crediting details and doing a few quick calculations can tell you what’s really happening.
For many consumers, the idea of pulling out a financial calculator, like the classic HP12C, and doing basic computations feels like rocket science. Yet the results can be revealing, whether you discover high internal costs or surprising credits.
My argument is simple: if more consumers ran these small calculations, many would think twice before accepting the glossy proposals presented to them. I’ve seen “retirement income” illustrations where the projected cash value, 15 years later, is still lower than the total premiums paid. If your 401(k) balance at retirement were less than your total contributions, wouldn’t you want to ask why?
This isn’t difficult math, but even well-informed clients and capable advisors often overlook it. A few simple calculations can shed a lot of light.
Bill Boersma is a CLU, AEP and LIC and the founder and owner of OC Consulting Group. More information can be found at www.OC-LIC.com, www.BillBoersmaOnLifeInsurance.info or email at bill@oc-lic.com or call at 616-456-1000.
