A retiree sent the post sale illustration of three life insurance policies that he bought more than twenty years ago. He asked for my views if he should continue the policy or give them up.
He told me that he does not need the money but will give up the policies if they provide him a poor return.
I analyzed the three policies using this approach. I take the cash value now and the annual premium paid for the next five years. I looked at the projected cash value at the end of five years and compute the yield.
The projected yields on the three policies are 1.2%, 3.3% and 3.9%. I also looked at the life insurance cover provided by the policy now. This is the current death benefit less the cash value. I sent the detailed calculation to him by email and spoke to him over the telephone.
The first policy has a low yield and should be given up. The second policy is borderline. The third policy is attractive and can be kept.
My benchmark is a yield of 4%. The third policy has a yield that is closed to 4% and can be kept for the next 5 years. The policy has a death benefit that is higher than the cash value by $150,000, and the cost of this coverage is quite small.
I calculate the cost of the coverage as follows. The current cash value plus future premium accumulated at 4% is (say) $180,000. The cash value at the end of 5 years is $160,000. The cost of coverage for the next 5 years is the difference of $20,000. This should be compared with the coverage of $150,000 for the next 5 years.
This calculation is "look forward". It does not calculate the yield for the past years of the policies, which is "look backward".
As I made the analysis for 3 policies, I asked the retiree to donate $250 to the Financial Services Consumer Association. He was delighted to make this donation, as he found the information to be useful.
If you wish to do the calculation on your own, you can buy this e-book: