Life Insurance Listings Company

We will look at a policy issued for $100,000. When it is issued, the entire $100,000 figure is at risk to the insurance company. The cash value of the policy acts as a reserve account, reducing the amount at risk to the insurance company. Therefore, if the cash value in the 30th year of the policy is $60,000 at a certain point, then the net amount at risk to the insurance company is $40,000.

The mortality cost is applied to the net amount at risk based on the insured’s attained age. With increasing age, the mortality cost per thousand of net amount at risk increases. The theory is that the total mortality cost will decrease as the cash value increases. As long as increases in the cash value (derived from premiums paid in and from investment earnings) are greater than the mortality costs and other expense charges, the policy should continue to grow and remain in-force. When the increases in the policy do not offset the charges, the cash value will commence a rapid descent leading to policy termination with no value.

It is also necessary to understand how the various factors are applied to the policy every month: First, the premium paid is added to the cash value from the end of the prior period. Then mortality costs and other expense charges are subtracted. Interest is credited to this value. Therefore, the interest credited applied to the policy is not the actual internal rate of return. The internal rate of return, an important financial yardstick, is always less than the current interest crediting rate.

There are three basic types of earnings - dividends and credited interest rates on traditional life insurance products. On Variable life insurance products, there are two types of accounts on a variable life insurance policy. The first is the fixed account and this account ears interest at the current rate. The other type is a variable account which has variable accounts whose earnings/loss is the net gain or loss from amount invested in the Variable Accounts.