What’s real?
By Bill Boersma
Though I knew about this years earlier, I still listened with interest when an associate recently told me about something he uncovered in an insurance proposal. He was looking at the growth in cash value from one year to another and realized that it was growing at a greater rate than the crediting of the policy. How could this be, he was wondering.
I went into some insurance carrier software and ran a random illustration to examine the numbers.
This particular product (not an IUL with multipliers) has a 4.95% stated crediting rate. In year 20 of the ledger, the cash value is $159,493, increasing to $168,246 the following year. This appears to be a growth rate of 5.49%. That doesn’t make a lot of sense. However, looking more closely at the ledger, I see a non-guaranteed persistency bonus. This is not uncommon, or even inappropriate, in many life insurance projections, and I often see a 25 basis point persistency bonus. However, starting in year six, the crediting rate is 6.25% in this ledger, making the 5.49% technically feasible.
Digging further, I checked the box on the illustration software to print out the annual accounting of debit and credits. From year 20 to 21, there was $10,970 in interest crediting, so the return is actually 6.88% when we’re taking policy expenses into consideration. Now we’re back to a growth rate that exceeds the stated crediting rate, but there’s more to it than that. There are additional policy credits of $4,011, which totals $14,981 of credits. This is a 9.39% rate of return.
This isn’t as high as the 16% in the illustration shared with me by my associate, but I just opened the software, ran a quote for a random person, and looked at the numbers at a random year. I’m sure I could find years that were better or worse.
It’s important to know and understand what goes into the 4.95%. I believe it’s essential that a prospective policy owner understands the meaningfully higher crediting rate based on a non-guaranteed persistency bonus. I think it’s crucial to ask questions regarding how a policy’s cash value can grow at 9% to 10% when that is hundreds of basis points greater than the policy’s crediting rate, even with the bonus.
I’m not making any claim that this is a phony life insurance projection, and I’m not going to dive into what might or might not be going on here. The only point of this piece is to get policy owners and their advisors to look closer and ask questions. If some policies don’t pan out as expected, maybe there’s a reason. When comparing guaranteed and non-guaranteed alternatives, it becomes vital to understand the nature of the underlying elements. It’s easy to make some look good, but what’s the chance it will come to pass?
I have never, not even once in over 30 years, had a client look at numbers like this. That’s a shame. They need to be doing so or working with somebody who can do that with or for them.
Bill Boersma is a CLU, AEP and licensed insurance counselor. More information can be found at www.OC-LIC.com, www.BillBoersmaOnLifeInsurance.info, via email at bill@oc-lic.com or call 616-456-1000.
