Overview

Main Menu Name: Life ROR

Calculates the rate of return realized from a life insurance policy on a year-by-year basis.

In this article:

• Background
• Why should I use this calculator?
• Getting Started
• Entering Data
• Results

Background

The actual interest credited to a life insurance policy normally exceeds the statutory guaranteed interest rate, typically in the range of three to six percent. Policy duration has a significant effect on actual interest earned; the longer the policy stays in force, the higher the actual credited rate.

The calculation process requires you to know six factors:

1. The cost for the amount of current protection (usually a competitive term insurance rate per thousand dollars of coverage at the attained age of the insured). (Term Rate)
2. The premium amount. (Premium)
3. The dividends paid for the year. (Div)
4. The current cash value. (Face)
5. The cash value one year ago. (Prior CV)
6. The face amount of coverage. (Face)

Following is the formula used to find the rate of return:
Rate of Return = {[(cv + div) + term rate x (face - cv) x (.001)] / (premium + prior cv)} - 1

There is a direct correlation under this formula between the term rate assumed and the rate of return; the higher the term rate, the higher the rate of return.

Taxes are not taken into consideration in this equation. The resulting rate of return is based on a before-tax internal buildup of cash values and should therefore be compared with tax-free bond yields.

Why should I use this calculator?

• To compare one or more policies.
• To discard policies that do not have an acceptable rate of return. It is also important to consider other factors such as the incontestable period, suicide clause, the financial strength of the insurer, and the composition and soundness of the insurer's portfolio.

Getting Started

The actual interest credited to a life insurance policy normally exceeds the statutory guaranteed interest rate, typically in the range of three to six percent. Policy duration has a significant effect on actual interest earned; the longer the policy stays in force, the higher the actual credited rate.

The calculation process requires you to know six factors:

1. The cost for the amount of current protection (usually a competitive term insurance rate per thousand dollars of coverage at the attained age of the insured). (Term Rate)
2. The premium amount. (Premium)
3. The dividends paid for the year. (Div)
4. The current cash value. (Face)
5. The cash value one yea ago. (Prior CV)
6. The face amount of coverage. (Face)

Following is the formula used to find the rate of return:

There is a direct correlation under this formula between the term rate assumed and the rate of return; the higher the term rate, the higher the rate of return.

Taxes are not taken into consideration in this equation. The resulting rate of return is based on a before-tax internal buildup of cash values and should therefore be compared with tax-free bond yields.

Entering Data

1. Face Amount of Policy:  Enter the face amount of the life insurance policy.
2. Current Cash Value:  Enter the current cash value of the life insurance policy.
3. Cash Value One Year Ago:  Enter the cash value of the life insurance policy as of one year ago.
4. Gross Annual Premium:  Enter the gross annual premium paid on the life insurance policy.
5. Dividends Paid During Year:  Enter the amount of dividends paid during the year.
6. Term Rate Per Thousand:  Enter the cost for the amount of current protection.

Results

The program calculates the rate of return (ROR) earned on the life insurance policy for the year.