i know the premiums stay the same but does the internal cost of insurance and fees increas over time eating away more and more of the inyterest and cash value?
when a policy is considered paid up does that mean the face value and cash value of the policy are equal.?
what about cost of insurance when its paid up .? do they still charge you cost of insurance even though for the most part your self insuring with the cash value.?
If you are talking about the
guaranteed values, the formula is simple:
(beg of year cash value + some portion of the gross premium) * (1+ some interest rate) - q * (face amount - end of year cash value) = end of year cash value.
The "q" is the probability of dying during that policy year, so it increases as you get older. But the (face amount - end of year cash value) quantity decreases every year. So the product of q * (face amount - end of year cash value) does not increase as fast as q.
You use "internal cost of insurance". If you mean q, it goes up every year. If you mean the product, that's more complicated.
When a policy is paid up, the same formula applies, but the premium component is zero. In every example that I've seen, the interest on the prior cv exceeds the cost of insurance, so the policy cv continues to increase after it is paid up.
The cv will eventually match the face amount. The common insurance term for that is the policy "matures" or "endows". At that point the ins company simply sends you a check for the face amount.
Yes, as the policy gets older you are increasingly self-insuring. That's why they are able to keep the premiums level or even make them go away.
It's common that the "some portion of the gross premium" term is zero in the first policy year, as the company is trying to recover it's marketing/issue costs.
Non-guaranteed values generally follow the same formula, but the important thing is that they are non-guaranteed. So any claims about "paid up" based on non-guaranteed stuff need to be examined closely.
"Universal Life" contracts disclose the factors in the formula above. That allows them to automatically deal with cases where people skip premiums or pay extra or want to change the face amount. "Traditional Whole Life" contracts do the math in the background and just show you the result. They assume fixed premium and benefit schedules so all the calculations can be done in advance. But, they require special procedures for changes.