If you are purchasing term life insurance, it is pretty simple to evaluate costs of different life policies. Compare the premiums charged by each company for the same amount of coverage.
It is more complicated to determine actual cost of whole life policies since cash values, dividends, interest you could have earned in other investments, and the number of years a policy is kept in force all play important roles.
Additionally, it is nearly impossible to tell ahead of time how your premium is divided among insurance coverage, commissions and company profits, how much goes into the cash-value fund, and how much interest you’ll earn on the cash value.
Whole life benchmarks. Insurance agents will happily produce a “net cost” calculation for you. It adds up all your premiums over a period of 10 or 20 years, subtracts expected dividends and cash value, then subtracts that number from total premiums to produce a net cost of coverage. It is usually a surprisingly low cost. Bu what the net-cost method ignores is the fact that you could have done something else with the money and perhaps earned even more than the policy paid you in dividends.
To overcome this shortfall, insurance industry analysts have created formulas called “interest-adjusted net-cost indexes.” These formulas assume you are going to have additional earnings (5%, for example) and add this to the cost of your premiums. Therefore these indexes take into account the possibility you might have chosen to invest the money elsewhere at that rate.
Two of these indexes to be aware of are:
- Interest-adjusted surrender cost – a measure of the true expected cost of keeping a policy in force for 10 or 20 years and then surrendering it for the cash value.
- Net payment cost index- assumes you hold on to the policy until you die.
Ask the agent. Most states require agents to provide these numbers for whole life policies if you ask for them. The interest-adjusted costs will vary by type of policy and your age at purchase. With these numbers in hand, you can better compare the costs of different policies within the same company and among different companies. Since the cost of whole-life insurance is all over the board, smart shopping can really pay off.
Ask your agent for the 10- and 20- year “interest-adjusted surrender costs” per $1,000 of face amount for the each policy being considered. Then ask for comparable data for the same kinds of policies issued by at least two additional companies. Some agents may be reluctant to give information about competitors’ policies, but the approximate information from most companies is readily available to them in manuals widely used in the insurance business. If the agent won’t or can’t help, call other companies yourself.
Careful research will be worth your time (and money) in the long run.