How Much interest does a life insurance policy accumulate?

Question

My aunt died recently, and she had a life insurance policy no one knew about, and my mom is the beneficiary. She wanted me to find out how much interest can be accumulated from a general policy. It was never updated, and it was just sitting there gaining interest since the 1960's. The original amount was $500. Does anyone have an estimate of how much it could be worth now? My mom told me if i found out, and helped her, she would give me some money :)

Answer 1

Sorry to hear from your loss, but the answer I'm going to give you is going to make you mad. However, it will also be an educational experience for you.

The way life insurance works is that it pays a death benefit upon death of the insured (your aunt) to a beneficiary (your mom). The type of life policy that your aunt has is called a cash value life insurance policy. This is a life insurance plus savings built into one policy.

While your aunt was still living, the interest rate that a person typically gets on the cash value is between 0-4%. When she died, your mom is suppose to get the death benefit plus the savings, right? Well, that's not how life insurance works.

In most cash value life insurance, it only pays out one or the other. If your aunt was living and she wanted to cancel the policy, she would get the savings, but lose the death benefit. Since your aunt is dead, your mom would only get the death benefit. So what happen to the savings? The insurance company keeps it and there's nothing you or your mom can do about it because it says it in the policy.

So to answer your mom's question, you would say "the interest rate is between 0-4%, but we're not going to see that money because the savings isn't ours. But at least we get the death benefit. If you don't believe me, we should read her life policy together."

Answer 2

$5200-$500=$4700 interest (5% compounded annually for 48 years; it's likely more than that because the rates used to be a lot higher than they are now.

Answer 3

First, I'm sorry for your loss.

Most of the people who responded to your question don't even know what they are talking about, when it comes to "industrial" life policies. Most agents today have never seen or heard of this type of policy. They do not accumulate cash value beyond the death benefit, unless they are "participating" policies.

The insured has a choice. He/she can cash in the policy for the accumulated value, or let beneficiary collect the face amount at death. The insurance company does not "keep the savings" in the policy. The cash value is included in the death benefit. If the insured lives to age 100, the cash value equals the death benefit. You can't have both, the CV AND the death benefit.

It was not uncommon to see premiums paid into these types of policies to be more than the death benefit. Some companies that sold these went ahead and paid the policies up when the premiums went above or equal to the death benefit.

Your aunt bought what is known as "industrial" life insurance. Industrial life insurance was usually a weekly premium policy, with the premiums paid weekly, or monthly.

These types of policies were written for people who worked in factories, and their families, or anyone else who wanted to provide insurance for burial purposes, but could not afford very much insurance.

(If you are in a totally dark room, and you can't afford a 100 watt light bulb, a CANDLE will suffice for the time being...right?)

Funeral expenses back in the 60's were about $500. So people bought these types policies to help with burial expenses, should they die prematurely.

I would imagine that an agent has gone back to her over the years to try to update her coverage.

When I first started in the life insurance business back in 1977, I was assigned a book of business to service. We called it a debit. There were many $500-$1000 policies in my book. I went to visit the policyholders, and updated a lot of them, but some didn't want to update, so they kept what they had.

These policies were just a few cents per week, such as $0.10 - $0.25.

Some agents today will say that these people needed term insurance. But tell me how you can buy a term policy for 10 - 25 cents a week.

Without the cash value accumulation, the premiums would have increased over the years. That's why term insurance premiums increase, or the face amount decreases; because they don't accumulate cash value to keep them level for life.

I know this isn't a lot of money, but I can relate. I can give you many examples of the 1950's and 1960's. But here is one.

When I was in the 7th grade, on the last day of school for the term in 1959, my homeroom teacher wanted to take the class, with chaperones, to Holiday Park, a play park with a swimming pool. Each student was to bring 25 cents for the pool entry fee. She took a show of hands of the students who wanted to go. Everyone raised their hands but me.

She asked why I didn't raise my hand. I told her (exact words) "No mun, no fun". She understood, and paid my 25 cents.

Times were hard back then. We didn't go hungry, but we didn't have a lot of extras. Young people today, 40 and younger, can't relate, because times began to change for the better when they were growing up.



BTW, my dad brought home about $40 a week back then, and my mom did house cleaning jobs for $1.00 an hour, 2-3 days a week.  Including my parents, we had a family of six.

These types of policies do accumulate a small amount of cash value. The death proceeds are paid in the amount of the face value of the policy, not the cash value. The cash value keeps the premiums level all throughout the years.

If one could have bought a term policy for 10 - 25 cents back then, It would cost a lot more than that today, at your aunt's age, IF it would have been in force when she died. It probably would have already expired, and there would be no insurance.

Here's the difference between whole life and term today.

WL has guaranteed premiums for the life of the policy, and pays the face amount at death or age 100, whichever comes first. It accumulates cash or loan value, and has other NON-FORFEITURE values. A person can combine WL and term to provide a larger death benefit, if he/she can't afford all WL.

An insured has an option to not pay premiums for life in a WL policy. The policy has non-forfeiture values in addition to the cash or loan value, such as reduced paid up value. If you pay the premiums for years and decide you want a paid-up policy, you have the option of taking a reduced amount of insurance, in proportion to what the cash value will puchase, paid up for the rest of your life, with no further premium payments. If you want the cash value to buy extended term insurance, it will purchase an amount of term insurance, equal to the face amount of the policy, extended for a specified period of time, depending on the amount of cash value.

Some WL policies pay dividends in addition to accumulating cash value. I recommend using the dividends to purchase paid-up additions, which increase the death benefit, with no additional premium payments. NONE of the "participating" companies that I have ever represented have ever failed to pay dividends, although the dividends are not guaranteed.

Term insurance DOES NOT have these options. With term insurance, you are basically RENTING the coverage for a specified period of time. It's like renting an apartment, or a car. It builds no equity.

Back to your question.

Your aunts policy does have a cash value, and she could have cashed it in, if she needed money at sometime in the past. The interest accumulation isn't very much, because she was only paying 10 - 25 cents a week for the policy. But the policy would have paid the face amount, had she died (assuming no major health problems on the date of application) after paying the first 10 -25 cents. Even if the policy was a limited pay; 10-pay, 20-pay, paid up at 65, the face amount is $500, and I doubt that it was a "participating"

policy.

The declarations page will show the death benefit, living benefits; accidental death, etc., the premium amount, and how long the payments are to be made. Also, it will say "Participating" or "Non-Participating".

If it says "Participating", it would have accumulated dividends. You aunt could have taken those in cash, had them applied to the premium, or bought paid-addition riders. IF the last is true, the death benefit will be a little more than $500.

If it says "Non-Participating", there are no dividends, and the maximum death benefit is $500.

The death proceeds will be $500, unless it paid dividends, which I doubt, plus interest from the date of her death until the claim check is cut.

Call the insurance company if you have any more questions.

Depending on the name of the company, it may not exist, because of mergers. There have been a lot of life insurance company mergers in the last 10-15 years. If this is the case, call your state insurance department and they can tell you what company has the policy.

Five hundred dollars back in the 60's is equivalent to about $5000 or more today.

My recommendation is to have a professional agent do a Financial Need Analysis to determine yours and your mom's total life insurance needs, so you won't end up with just a "CANDLE".

Answer 4

Call the insurance company to find out, but a $500 would be $2000 at most.  they generate very little interest...maybe 2%.

Answer 5

Well, none.  Usually, they just pay out face vaue.  If it was a paid in full policy, and the extra "interest" was used to buy extra paid up insurance, it *might* be worth $600 or $700.  

The insurance company can tell you for sure, what it is worth - you have to call them.

But insurance policies are CRAPPY investments.  They don't pay out much in interest for the "investment" type policies, and the majority of them, any "savings" reverts to the insurance company when the person dies.   You're not getting rich off THIS policy.

And a $500 isn't going to pay 5% compounded annually, that's a silly high guess.