My life insurance policy states I have a 'guaranteed cash value' and a net cash surrender value...what are the differences between the two terms?
Total Comments: 8
Posted: Mon Mar 31, 2008 02:00 am Post Subject:
Hello Sherr, welcome to the community.
Unlike term life insurance, which does not accumulate any cash values, a portion of your permanent (whole life and its ilk) insurance premium payment accumulates as a guaranteed cash value. Understand that, by law, the insurance company has to guarantee a policyholder something. By using the absolute minimum interest rate and the guaranteed maximum cost of insurance allowed, they calculate the Guaranteed Cash Value. The Guaranteed Cash Value is sometimes referred to as the worst-case scenario and some say that you should always consider anything you get over and above the guaranteed rate a bonus. I tend to agree with the worst-case scenario analogy.
If you choose to surrender the policy, these guaranteed cash values would be the smallest amount available to you. Or, as long as the policy is in force, you may borrow against them as a policy loan at the current policy loan interest rate.
The amount of your guaranteed cash value depends on the kind of whole life policy you have, its size and how long you have had it. Policy growth is tax deferred under current federal income tax law. Remember that borrowed amounts will reduce the death benefit and cash surrender value.
The Net Cash Surrender Value is the amount of cash value in the policy accumulation fund minus any outstanding loans etc. This is the amount you get when/if you terminate your permanent life insurance policy prior to death.
For more information, go to the Life Insurance Guide section.
Posted: Mon Mar 31, 2008 05:15 am Post Subject: a couple of queries..
The Net Cash Surrender Value is the amount of cash value in the policy accumulation fund minus any outstanding loans etc.
Would you care to explain what this accumulation fund should consist of? Is it the accumulation of guaranteed cash values?
In that case, if I don't have any loan, would it mean my accumulation of guaranteed cash values = net cash surrender value ?
Awaiting your reply..
Svendelacruz
Posted: Mon Mar 31, 2008 04:28 pm Post Subject:
Svendelacruz,
Sure. At all times, remember that your cash value is nothing more than an overpayment of premiums.
For this example, let's say that you are 35 years old and you purchase a $100,000 Universal policy for $100 per month.
When the policy is issued, the company calculates an amount called a Target Premium. This is the amount necessary to (based on the most current interest rates and cost of insurance charges) make sure the policy reaches its Maturity Date or until you die - whenever that might be. Under normal circumstances, the amount of your premium will be the same as your target premium.
In the early years, the target premium is not what your insurance actually costs. At 35 years old, your actual cost of insurance might be only $15. If you are paying $100 per month, where does the extra $85 per month go? Into your accumulation fund / Cash Value account. As you get older - say 45, the cost of your insurance will increase because the older you get, the closer you get to death and the greater the risk you become. Let's say at 45, the cost will be $30 per month. You are still paying $100 every month and the extra $70 goes into your cash value. At 60 years old, your cost of insurance is $80 per month and your accumulation fund is only getting $20 per month. However, at 66 years old, your cost of insurance is now $101 per month. At 70, the cost of your insurance is $160 per month and at 83, the cost of your policy is $310 every month - and you are still paying $100. Where does all the extra money come from? Why your cash value / accumulation fund, of course. You are now essentially "robbing Peter to pay Paul."
The money in that cash value account earns interest. The company will Guarantee you an interest rate of 2.5% or promise you whatever their current rate is - say 5%. This is their Illustrated Rate
This means that your cash value account - or overpayment of premiums - will never earn less than the 2.5% Guaranteed Rate and not more than whatever rate the company is currently illustrating.
Let's say when you turn 50, a agent comes along and promises you the world. He tells you that you can cancel your old policy and buy his product - which he claims will pay you a little more interest. You believe him (too many people do this) and cancel your policy. Because any early-surrender penalties will have already expired and you have no loans against your policy, you get the amount that's in your accumulation fund as your Net Surrender Value. If you had loans against your cash value, this amount would be held back to pay off the loan. You would therefore get anything that's left.
Too many agents will tell you that you can remove the money from your cash value account to supplement your retirement, send kids to college, take the vacation you've always dreamed of, etc., etc. Now that you have a better idea of what a cash value actually consists of, you must understand why taking it away could harm your policy in your later years.
Without that accumulation fund to supplement you payments, you get stuck with the ever-increasing bill. When you can't afford it, the company cancels your policy, keeps all your money, and you get nothing.
Busting these agents is what I do for a living.
Mark
Posted: Sat Apr 05, 2008 11:16 am Post Subject:
Sherr,
While Mr. Colbert's explainations are generally correct they are not exactly accurate.
I'll explain:
The Guaranteed Cash Value is sometimes referred to as the worst-case scenario and some say that you should always consider anything you get over and above the guaranteed rate a bonus. I tend to agree with the worst-case scenario analogy.
It's true the Guaranteed Cash Value is the worst case senario but stating anything above as a "bonus" is simply not accurate.
A life insurance policy is a CONTRACT and contained within that CONTRACT the life insurance company must state the very least they will ever pay in interest AND the very MOST they will charge for the insurance.
The mathematical result of those two items produces the Guaranteed Cash Value. For the Guaranteed Cash Value to ever come into play three things would have to happen:
1) Interest rates go to hell in a hand basket and NEVER get better EVER.
2) Something happens with mortality and people start dying younger and younger and younger forcing the company to charge the highest insurance rates.
3) This all happens the day after you buy your policy and it NEVER, EVER gets any better.
Your Accumulation Value is based on the CURRENT cost of insurance and the CURRENT interest rate declared by the life insurance company each year.
Your Net Cash Surrender value is the Accumulation Value minus a surrender charge.
However, at 66 years old, your cost of insurance is now $101 per month. At 70, the cost of your insurance is $160 per month and at 83, the cost of your policy is $310 every month - and you are still paying $100. Where does all the extra money come from? Why your cash value / accumulation fund, of course. You are now essentially "robbing Peter to pay Paul."
Not exactly.
While it's true the cost of insurance increases with age. But since the cash value becomes part of the death benefit as the person is increasing in age they are effectively buying less and less life insurance each and every year which serves to mitigate the rising internal cost of insurance in the later years and the keeps the monthly expenses some what level IF the policy was designed correctly from the start.
There are exceptions to this but I don't want to write a dissertation on life insurance only wanted to clarify a generally accurate post by InsInvestigator.
My 2 cents which in 1913 had the purchasing power of 43 cents today.
Posted: Sat Apr 05, 2008 03:47 pm Post Subject:
GarySpicuzza,
Welcome to the community and thanks for the post. After reviewing my post(s) for accuracy, I didn't find anything that I stated was incorrect but, I definitely think your post was better.
Because most of my seminars and articles are for people who don't usually have a clue about life insurance, I usually tend to "dumb things down" a bit in order to educate the greatest number of people with the least amount of effort.
You've done a good job. I hope to see you around the community.
Mark
Posted: Wed Nov 12, 2008 06:39 am Post Subject: life insurance question
I bought a life insurance policy 7 years ago from Farmer's. I pay $100 a month(no cash value loans). We have our home paid for & we are building a little wealth in small sideline investments. I'm thinking I could do better with my $100 a month invested in other projects. Also, if I choose to surrender it, would it be better for me to wait until January so I could report the value on my 2009 taxes instead of 2008. I am a 52 year old woman & both me & my husband work. I'll have much better tax right offs in 2009 than this year. Also, with the new president elect promising big tax breaks for the middle class, I'm thinking my tax debt may be less that year anyway. Does anyone here believe this & if my thinking is skewed, please set me straight before a make another mistake. zigumfus[at]yahoo.com
system edited-e-mail is deactivated for your safety
Posted: Wed Nov 12, 2008 06:40 am Post Subject: correction
excuse me, write offs :}
Posted: Wed Nov 12, 2008 07:16 pm Post Subject:
Hello NotASavvyInvestor, welcome to the community.
I'd like to hear more about your life insurance policy with Farmers. You stated that you've been making premium payments of $100 each month for the past seven years. Because you wrote "no cash value loans" I understand this is not a term policy. Because the most commonly sold policy with Farmers is the FFUL (Farmers Flexible Universal Life) plan, my "red flags" are flying at half-mast.
Tell me a little bit more about your policies, and I'll help get you through this.
Posted: Mon Mar 31, 2008 02:00 am Post Subject:
Hello Sherr, welcome to the community.
Unlike term life insurance, which does not accumulate any cash values, a portion of your permanent (whole life and its ilk) insurance premium payment accumulates as a guaranteed cash value. Understand that, by law, the insurance company has to guarantee a policyholder something. By using the absolute minimum interest rate and the guaranteed maximum cost of insurance allowed, they calculate the Guaranteed Cash Value. The Guaranteed Cash Value is sometimes referred to as the worst-case scenario and some say that you should always consider anything you get over and above the guaranteed rate a bonus. I tend to agree with the worst-case scenario analogy.
If you choose to surrender the policy, these guaranteed cash values would be the smallest amount available to you. Or, as long as the policy is in force, you may borrow against them as a policy loan at the current policy loan interest rate.
The amount of your guaranteed cash value depends on the kind of whole life policy you have, its size and how long you have had it. Policy growth is tax deferred under current federal income tax law. Remember that borrowed amounts will reduce the death benefit and cash surrender value.
The Net Cash Surrender Value is the amount of cash value in the policy accumulation fund minus any outstanding loans etc. This is the amount you get when/if you terminate your permanent life insurance policy prior to death.
For more information, go to the Life Insurance Guide section.
Posted: Mon Mar 31, 2008 05:15 am Post Subject: a couple of queries..
The Net Cash Surrender Value is the amount of cash value in the policy accumulation fund minus any outstanding loans etc.
Would you care to explain what this accumulation fund should consist of? Is it the accumulation of guaranteed cash values?
In that case, if I don't have any loan, would it mean my accumulation of guaranteed cash values = net cash surrender value ?
Awaiting your reply..
Svendelacruz
Posted: Mon Mar 31, 2008 04:28 pm Post Subject:
Svendelacruz,
Sure. At all times, remember that your cash value is nothing more than an overpayment of premiums.
For this example, let's say that you are 35 years old and you purchase a $100,000 Universal policy for $100 per month.
When the policy is issued, the company calculates an amount called a Target Premium. This is the amount necessary to (based on the most current interest rates and cost of insurance charges) make sure the policy reaches its Maturity Date or until you die - whenever that might be. Under normal circumstances, the amount of your premium will be the same as your target premium.
In the early years, the target premium is not what your insurance actually costs. At 35 years old, your actual cost of insurance might be only $15. If you are paying $100 per month, where does the extra $85 per month go? Into your accumulation fund / Cash Value account. As you get older - say 45, the cost of your insurance will increase because the older you get, the closer you get to death and the greater the risk you become. Let's say at 45, the cost will be $30 per month. You are still paying $100 every month and the extra $70 goes into your cash value. At 60 years old, your cost of insurance is $80 per month and your accumulation fund is only getting $20 per month. However, at 66 years old, your cost of insurance is now $101 per month. At 70, the cost of your insurance is $160 per month and at 83, the cost of your policy is $310 every month - and you are still paying $100. Where does all the extra money come from? Why your cash value / accumulation fund, of course. You are now essentially "robbing Peter to pay Paul."
The money in that cash value account earns interest. The company will Guarantee you an interest rate of 2.5% or promise you whatever their current rate is - say 5%. This is their Illustrated Rate
This means that your cash value account - or overpayment of premiums - will never earn less than the 2.5% Guaranteed Rate and not more than whatever rate the company is currently illustrating.
Let's say when you turn 50, a agent comes along and promises you the world. He tells you that you can cancel your old policy and buy his product - which he claims will pay you a little more interest. You believe him (too many people do this) and cancel your policy. Because any early-surrender penalties will have already expired and you have no loans against your policy, you get the amount that's in your accumulation fund as your Net Surrender Value. If you had loans against your cash value, this amount would be held back to pay off the loan. You would therefore get anything that's left.
Too many agents will tell you that you can remove the money from your cash value account to supplement your retirement, send kids to college, take the vacation you've always dreamed of, etc., etc. Now that you have a better idea of what a cash value actually consists of, you must understand why taking it away could harm your policy in your later years.
Without that accumulation fund to supplement you payments, you get stuck with the ever-increasing bill. When you can't afford it, the company cancels your policy, keeps all your money, and you get nothing.
Busting these agents is what I do for a living.
Mark
Posted: Sat Apr 05, 2008 11:16 am Post Subject:
Sherr,
While Mr. Colbert's explainations are generally correct they are not exactly accurate.
I'll explain:
The Guaranteed Cash Value is sometimes referred to as the worst-case scenario and some say that you should always consider anything you get over and above the guaranteed rate a bonus. I tend to agree with the worst-case scenario analogy.
It's true the Guaranteed Cash Value is the worst case senario but stating anything above as a "bonus" is simply not accurate.
A life insurance policy is a CONTRACT and contained within that CONTRACT the life insurance company must state the very least they will ever pay in interest AND the very MOST they will charge for the insurance.
The mathematical result of those two items produces the Guaranteed Cash Value. For the Guaranteed Cash Value to ever come into play three things would have to happen:
1) Interest rates go to hell in a hand basket and NEVER get better EVER.
2) Something happens with mortality and people start dying younger and younger and younger forcing the company to charge the highest insurance rates.
3) This all happens the day after you buy your policy and it NEVER, EVER gets any better.
Your Accumulation Value is based on the CURRENT cost of insurance and the CURRENT interest rate declared by the life insurance company each year.
Your Net Cash Surrender value is the Accumulation Value minus a surrender charge.
However, at 66 years old, your cost of insurance is now $101 per month. At 70, the cost of your insurance is $160 per month and at 83, the cost of your policy is $310 every month - and you are still paying $100. Where does all the extra money come from? Why your cash value / accumulation fund, of course. You are now essentially "robbing Peter to pay Paul."
Not exactly.
While it's true the cost of insurance increases with age. But since the cash value becomes part of the death benefit as the person is increasing in age they are effectively buying less and less life insurance each and every year which serves to mitigate the rising internal cost of insurance in the later years and the keeps the monthly expenses some what level IF the policy was designed correctly from the start.
There are exceptions to this but I don't want to write a dissertation on life insurance only wanted to clarify a generally accurate post by InsInvestigator.
My 2 cents which in 1913 had the purchasing power of 43 cents today.
Posted: Sat Apr 05, 2008 03:47 pm Post Subject:
GarySpicuzza,
Welcome to the community and thanks for the post. After reviewing my post(s) for accuracy, I didn't find anything that I stated was incorrect but, I definitely think your post was better.
Because most of my seminars and articles are for people who don't usually have a clue about life insurance, I usually tend to "dumb things down" a bit in order to educate the greatest number of people with the least amount of effort.
You've done a good job. I hope to see you around the community.
Mark
Posted: Wed Nov 12, 2008 06:39 am Post Subject: life insurance question
I bought a life insurance policy 7 years ago from Farmer's. I pay $100 a month(no cash value loans). We have our home paid for & we are building a little wealth in small sideline investments. I'm thinking I could do better with my $100 a month invested in other projects. Also, if I choose to surrender it, would it be better for me to wait until January so I could report the value on my 2009 taxes instead of 2008. I am a 52 year old woman & both me & my husband work. I'll have much better tax right offs in 2009 than this year. Also, with the new president elect promising big tax breaks for the middle class, I'm thinking my tax debt may be less that year anyway. Does anyone here believe this & if my thinking is skewed, please set me straight before a make another mistake. zigumfus[at]yahoo.com
system edited-e-mail is deactivated for your safety
Posted: Wed Nov 12, 2008 06:40 am Post Subject: correction
excuse me, write offs :}
Posted: Wed Nov 12, 2008 07:16 pm Post Subject:
Hello NotASavvyInvestor, welcome to the community.
I'd like to hear more about your life insurance policy with Farmers. You stated that you've been making premium payments of $100 each month for the past seven years. Because you wrote "no cash value loans" I understand this is not a term policy. Because the most commonly sold policy with Farmers is the FFUL (Farmers Flexible Universal Life) plan, my "red flags" are flying at half-mast.
Tell me a little bit more about your policies, and I'll help get you through this.
Mark
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