Finding The Rate of Return on Your Whole Life Insurance Policy


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When shopping for a whole life insurance policy, most people focus on finding one that offers the biggest rate of return. After all, buying life insurance can be a lucrative way to grow your money which means leaving a sizable death benefit to your loved ones.

To project how much money your whole life insurance policy will yield 10, 20 or even 30 years from now, insurance companies calculate the policy’s expected yearly growth. Better known as the “internal rate of return,” your IRR will dramatically change the longer you own the policy. The IRR can also help you decide whether it’s smarter to hold on to your policy or shop around for a new one.

Unfortunately, calculating the IRR of your whole life insurance policy is easier said than done. It’s a lot more complicated than simply reading your policy’s fine print. Here are some tips for determining the rate of return on your whole life insurance policy.

How to calculate your whole life insurance’s rate of return

It’s a common belief that the cash value in your whole life insurance policy will skyrocket year over year. However, that’s rarely the case. If you’re looking to calculate your money’s projected growth in a whole life insurance policy, you’ve come to the right place. We compiled a few tips to help you figure it out without all the complicated insurance jargon.

Hire a professional

Figuring out the rate of return on your whole life policy is almost impossible for consumers to do without help from the pros, says Tony Steuer, a life insurance analyst in Alameda, Calif., and author of “Questions and Answers on Life Insurance.”

Life insurance companies are complex entities and there are many factors that are used to set the rate of return. The average person isn’t privy to these factors, or even how the formula is calculated, which is why it can be beneficial to hire a professional.

A life insurance analyst or financial planner is able to analyze your policy’s projected performance overtime, compare it to other policies and help you figure out an accurate estimated IRR. They can also look into things that affect the IRR, like mortality rate changes, which policyholders can’t easily access on their own.

Hiring a professional probably isn’t the cheapest option, but you’ll get the most realistic idea of how much your money could grow in the near future. If the IRR projection is grim, a professional can also help you find a policy that offers a higher rate of return or suggest a more lucrative investment product.

Examine the insurance company’s dividend payout history

While whole life providers frequently won’t disclose how your rate of return is calculated, they will offer illustrations of how your policy is projected to perform in the future.

These illustrations should include information on the costs of the policy, how much you’ve paid, your current death benefit and the cash surrender value you would get for canceling the policy today. It should also include future predictions on how your policy should perform five, 10 and 20 years down the road.

However, keep in mind that insurance illustrations are lengthy, frequently riddled with tough-to-understand industry jargon and could include predictions so outrageously optimistic, there’s no way your policy will actually reach them.

“(Insurance illustrations) include a guaranteed column,” says Kelly O’Connor, managing agent with Mountain Financial, LLC, a wealth management group in Greenwood Village, Colo. This explains what the policy is guaranteed to look like over a certain time frame. “(Consumers) can trust that guaranteed piece of the illustration.”

In certain whole life contracts, O’Connor says that consumers can get an idea of how close other projections are by examining the company’s dividend payout history.

“All mutual insurance companies publish their dividend history, so if you look back and see that they’ve never been under 5.5 or 5.25 (percent dividends) for the last 100 years, there’s a pretty good chance that that will continue,” he says.

Check IRR projections over the next decade

Cash value life insurance policies are designed to be long-term investments, not short-term ways to make a quick buck, says Glenn Daily, a Certified Financial Planner and fee-only insurance consultant based in New York City. To understand the rate of return for your policy, check out how the policy is projected to perform over the next few decades.

If you’re thinking of buying a new policy, “You need to see the average annual and year-by-year rate of return for at least the first 20 years,” says Daily. Those who already own policies should focus on the average annual and year-by-year rates of return for the next five to 10 years. By examining how their whole life policy is performing on a yearly basis, consumers get a firm idea of what kind of performance they can expect in the near future.

Consumers should know that the year-by-year rate of return will substantially differ from the rate of return generated over several years, says James H. Hunt, a life insurance actuary for the Consumer Federation of America and former insurance commissioner of Vermont.

“It may take as long as 10 years for the average annual rate of return on a cash value life insurance policy to turn positive, mainly due to heavy first year commissions and related sales expenses,” he says.

When comparing policies or deciding if it’s worthwhile to stick with the one you have, Hunt recommends hiring a third-party insurance analyst to evaluate whether a whole life policy makes sense in the long haul.

“It’s impossible to know what you’re getting into without hiring an expert,” he says.

Is whole life insurance worth it?

Given everything we’ve mentioned until this point, you’re probably wondering if whole life insurance is a good investment. The short answer is—it’s worth it for some people. Specifically, whole life insurance can be a good option for high-income individuals who have maxed out their tax-deferred investment accounts, like a 401k or Roth IRA. It can also be beneficial for individuals who have life-long dependents, like children with special needs.

However, whole life insurance policies are typically very expensive. Unless you’re getting an amazing IRR, it’s not worth the high premiums. For a majority of people, a term life insurance policy is a better option. The premiums are cheaper and you can get a similar amount of coverage.

It’s important to remember that just because whole life insurance has an investment component, doesn’t mean it’s a great investment strategy. The IRR on a whole life insurance policy is typically very low compared to other investments because life insurance has additional expenses that other investments don’t require.

Frequently asked questions

What is the best whole life insurance?

There isn’t one whole life insurance company that offers the best policies for everyone. Each company has their pros and cons, so the best company for you depends on what you’re looking for. Based on our research, some of the top companies for whole life insurance are Northwestern Mutual, State Farm and MetLife.

Who needs whole life insurance?

Not many people actually need whole life insurance. It can be a good option for high earners who have reached the maximum contribution limit for tax-deferred investments, like a 401k account. Because whole life insurance stays with you for your entire lifetime, it can also be a good choice for individuals with life-long dependents because their coverage will never run out.