Expert: Steve Holleran - 3/13/2007

Question
Steve:  I have watched my life insurance policy decrease in value and I questioned them on how they calucate the interest that is added to my cash value monthly.  I understand the equation which is [((1+i)^(1/12))-1].  The annual interest is 'i'.  In my case i is 4.5% and I come up with a monthly equivalent of 0.36748094% which is multiplied times the policy value to give me that month's interest value.  My question is the following:  Is this a fair way to calculate the monthly interest or is the insurance company using an exotic formula to save a few cents per month at the expense of the policyholders?  Is there a correct way to compute the monthly interest?

Answer
Hi Larry,

Well, I'm not going to be a whole lot of help here.  I don't know what type of insurance you're dealing with, or the payment amounts or details, but what you've already told me seems correct as far as it goes.

Basically an insurance policy is a type of annuity, and there are several types of these.  Two main ones are an ordinary annuity and an annuity due.  There are subtle differences in the formulas and calculations in these, and a lot of it depends on whether payments are considered in advance or in arrears.

In any case, I am certainly not an expert on this, and freely admit so.  I wish I could give you a better answer, but my math agrees with yours.

I hope you can find the info you're looking for.

Sorry, Steve Holleran