Indexed Whole Life
MR. WATSON: Inflation! It can be ruthless. The cost of eggs, milk, bread and other staples increase to an amount that makes the dollar not worth what is was before. It won't buy as much.
JERSEY: Yeah! Groceries cost a lot more now than a year ago.
MR. WATSON: To keep up with inflation insurance companies introduced the Indexed Whole life policies. They are tied to the Consumer Price Index (CPI). If inflation goes up, the whole life death benefit goes up by the same percentage.
The word INDEX means "average", so if the average cost of eggs, milk, bread, etc. goes up by 3%, the death benefit will increase by the same amount. Some companies will charge for this, others do not.
STUDENTS: Got it. Index means average.
Interest Sensitive Whole Life (the interest rate affects the premium OR the cash value)
MR. WATSON: You have an interest-sensitive whole life policy . Whole life gives you no changes. Interest Sensitive Whole Life is just what the names implies. Interest Sensitive.
MR. WATSON: The interest-sensitive, gives you two choices. The interest rate affects:
- premiums or
- cash value.
MR. WATSON: For a $100,000 policy, if you are paying in a thousand dollars a year and the cash value is earning 5 percent interest, do you agree that seventy years from now you are going to have $100,000? It endows. What if the interest rate went up 15 percent and you continued to pay in $1,000? Then the cash value would grow faster. Do you agree?
ALL: Yes.
MR. WATSON: Therefore, it would endow sooner. If it endowed before 95, you have to pay taxes on the gain. If a policy endows before age 95, the gain will be taxed.
MR. WATSON: You could choose to have the interest rate affect the premium and if the interest rate went up, your premium would go down. It's your choice, let the interest rate affect the cash value and it will grow faster or let the interest rate affect the premiums and they could go down.
MR. WATSON: Whole life-how many options did you have?
STUDENTS: None.
MR. WATSON: With interest-sensitive, the interest rate affected the premium or-
ALL: -- cash values.
MR. WATSON:
- Whole life, no choices.
- Interest-sensitive, two choices (interest rate affects the premium OR cash value)
MR. WATSON: Printing the chart below will help. Study it.
