Understanding Annual Life Insurance Statements

If you have a permanent life insurance policy the life insurance company will generally mail out an annual statement around the month of your policy date. Unfortunately, most life insurance companies are still set up on archaic systems which makes the statements difficult to understand.

Understanding the terminology of your statement is important. Some examples of commonly used words are clarified below:

  • Insured– most likely you, but in some situations the policy could be owned by someone else or some type of business
  • Death Benefit– amount the insurance company will pay to the beneficiary if the insured passes away while the policy is in-force.
  • Policy Date / Issue Date– the starting point of the policy
  • Riders– additional features that can be added onto the policy, usually at an extra expense
  • Account Value / Accumulation Value– the amount of money inside the life insurance policy which can be used to pay for the cost of insurance
  • Surrender Value orNet Surrender Value– the amount of money the insurance company will give the owner of the policy if the policy were to be cancelled. Also, important to note loans are typically borrowed from the surrender vale and not the accumulation value
  • Premiums Receivedor Premium Payments– money paid into the policy over the past year which goes into the accumulation value.
  • Insurance Charges– generally the cost of insurance being charged by the insurance company over the past year
  • Fees – additional expense charges deducted from the accumulation value
  • Interest Credited– the amount of money credited to the accumulation value because of current interest rates, dividends, or index crediting methods

Some annual statements will also include verbiage as to how long the permanent life insurance policy will likely last, for example:

 

The first sentence pertains to the very worst-case scenario with the insurance company going to the guaranteed maximum cost of insurance and crediting the least amount of interest possible. This scenario is very unlikely to happen, but if it were to happen the policy would lapse (run out / be over) in 13 years. The second sentence pertains to if the policyholder stops paying premiums, if the insurance company is charging the normal cost of insurance and if they are crediting the current interest rate of 4.5%. If this were to happen the policy would lapse in 24 years. The third sentence is most realistic with the policyholder paying the current premium going forward and the insurance company charging the normal cost of insurance and crediting the current interest rate of 4.5%. In this scenario the policy would lapse in 37 years. Most people do not understand how permanent life insurance policies work and assume the policy is guaranteed to last forever which is not the case with most policies sold today. The above image is taken from a client’s personal statement with a big-name insurance company. This client happens to currently be age 52 which means in all likelihood his policy will lapse when he is 89 years old unless he starts paying more premiums.

In order to ensure that your policy does not lapse, as in the case above, it is important to work with an agent who will do periodic policy reviews of your current life insurance policy. If you are in the market for life insurance and would like to speak with someone from the Pacific Insurance Group team based out of Bellevue Washington, please call the office directly at 425-246-4222.