The rate of return you get from an investment in whole life insurance is based on the insurance company’s ability to invest wisely. The company combines all the cash-value money it gets from all its policyholders and invests this sum, usually in low-risk investments, which naturally pay lower profits than many other investments. Regardless of what return the company gets on its investment, though, most whole life policies guarantee at least a minimum rate of return. Anything the company makes over that (and over and above its costs) goes toward your cash value. In this example, the insured — a 38-year-old married man — insures himself for $50,000, for which he pays $51 per month ($612 per year). He also begins the policy with an initial investment of $1,596. The company guarantees him a rate of return of 4 percent but shows projections of double and almost triple the return (8 percent and 10.75 percent respectively).
The projections that insurance agents give you are often little more than high hopes, and you shouldn’t count on getting anything more than what is guaranteed. If you look at the actual return, you can see that it’s just a bit higher than the minimum guaranty. But it’s also significantly lower than either of the more optimistic projections the agent presented. Note that the cash value never exceeds the amount of the premiums paid with the 4 percent guaranteed return (which is just over the minimum). On the other hand — in part because of the initial investment — somewhere around the 10th year, all of the premium paid goes toward the cash value, meaning that the interest on the reserve amount actually covers the cost of the insurance itself. As you age, the cash value increases at a slower rate because your insurance costs more. From the 20th to the 25th year, for example, this policyholder pays over $4,000 in premiums, but his cash value increases only $1,200. That lower yield reflects the very high cost of purchasing insurance at age 60, indicating that unless you still want a death benefit at that age, you may want to cash out the policy.
The projections that insurance agents give you are often little more than high hopes, and you shouldn’t count on getting anything more than what is guaranteed. If you look at the actual return, you can see that it’s just a bit higher than the minimum guaranty. But it’s also significantly lower than either of the more optimistic projections the agent presented. Note that the cash value never exceeds the amount of the premiums paid with the 4 percent guaranteed return (which is just over the minimum). On the other hand — in part because of the initial investment — somewhere around the 10th year, all of the premium paid goes toward the cash value, meaning that the interest on the reserve amount actually covers the cost of the insurance itself. As you age, the cash value increases at a slower rate because your insurance costs more. From the 20th to the 25th year, for example, this policyholder pays over $4,000 in premiums, but his cash value increases only $1,200. That lower yield reflects the very high cost of purchasing insurance at age 60, indicating that unless you still want a death benefit at that age, you may want to cash out the policy.
No comments:
Post a Comment