The Three Different Cash Value's
The cash value inside a permanent life insurance contract can come in multiple forms. When evaluating an insurance contract for your client, you should remember there are three possible outcomes for the cash value. Luckily, the insurance contract doesn't keep us guessing about the results shown in the illustration. These are the three scenarios, at a minimum, you should consider together with your client when it comes to their cash value policy.
Guarantee values – Insurance companies will issue guarantees. These are contractually guaranteed numbers that the insurance company, by contract, must honour. These numbers can be found inside the policy contract. Not always are the numbers shown to the client the actual guaranteed cash values, so if your client is looking for something locked in, ensure you are being offered the guaranteed values.
Illustrated Cash Value (At current dividend rates) – This is what the value of the cash account inside the policy will be if the current dividend rate or return stays the same in the future, forever. This scenario could be likely but also assumes that there is no chance of a changing dividend. By relying on the current dividend scale projections, you are ignoring the market risk of the policy and may be setting the bar too high for this type of product. Make sure you and your clients understand that these numbers are hypothetical, and these outcomes cant be guaranteed.
Alternative Cash Value scenarios(At discounted dividend rates) – These values can be found inside the policy contract. An alternative scenario takes the current dividend and lowers it by 1% or 2%. The alternative scenarios show what the policy might look like if the dividend rate was reduced. Demonstrating this would help see where the contract would end up twenty to thirty years from now. This consideration would be a "crash test" for the cash value policy if rates were to lower. Some contracts can make financial sense if we base them on the current rates, but once we look at a reduced dividend rate, the policy turns ugly quickly.
Each client has a different goal for their insurance. Make sure that the proposed solution matches that goal and will align in the long term. Guarantee values are contractually based, and your client can rest easy knowing that number will show up at the end of the day. Alternative dividend scales can give you a great idea of what some of the worst-case scenarios might look like. If the policy numbers don't make sense in the worst-case scenario and your client's goal can not be achieved, it might be nice to go back to the drawing board for another insurance solution. Lastly, the current dividend rate can give you a great snapshot of how this policy can shine. Many insurance companies in the market have had stable dividend rates for years and years, but it is always wise to consider the worst-case scenario when making sure the numbers make sense!
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