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Why would a life insurance policy started 25 years ago decrease by half or more?
Wiki User
∙ 12y ago
Without seeing the policy, it is hard to say. However, there are at least a couple of possibilities:
1. It is a "decreasing term" policy. This is a variety of life insurance that has a high face value at the beginning of the policy, but that decreases over the life of the policy. This kind of policy is often sold to a fairly young head of household, whose life insurance needs are high. The need arises, for example, because in the event of premature death, funds are required to raise children. As the policy ages, and therefore the theoretical need for life insurance protection decreases, the amount of life benefits decrease.
2. It is a whole life policy. This is otherwise called "permanent insurance". It builds cash value, which is a kind of savings account built into the policy. A part of the monthly premium is applied to the cost of insurance, and a part is applied to the cash value. Although cash value accumulates slowly at first, over the life of the policy, it can build substantially.
Additionally, some policies allow the policyholder to divert what would otherwise be held by the insurer and applied to cash value, to mutual funds or other investments. While there is a risk to doing this, such as the Stock Market declining, there is also the potential of the market rising and the cash value increasing more quickly.
Over a period of time that cash value has accumulated, the policyholder may have decided, or neglected, to pay premiums. For at least some of the time that premiums were not paid by the policyholder, the insurance company may have deducted premiums from the cash value, thereby keeping the policy in force.
All of that said, it is conceivable, but unlikely, that a policy could have survived on its cash value for 25 years
Wiki User
∙ 12y ago
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