Purchasing and Pricing Life Insurance

Question 1

Describe the Traditional Net Cost Method of calculating the cost of life insurance.

(3 things)

Answer 1

-Doesn’t use TVM

-Some States prohibit it (damn lol)

-Not good!

Question 2

Main difference between Surrender Cost Index Method and Net Payment Cost Index Method

Answer 2

Surrender Cost - focuses on cash surrender value

Net Payment Cost - focuses on cost efficiency of pure death benefit coverage; ignores CASH VALUE

Question 3

How do you get “Annuity Due Factor?”

Answer 3

The deposit you make into an annuity gains x interest rate at the beginning of each year over y years

Question 4

How does the Surrender Cost Index Method for calculating cost of Life Insurance work?

Answer 4

The economic value of the cash surrender value is subtracted from pure death benefit coverage cost.

Question 5

Formula for Surrender Cost Index Method (for calculating cost of Life Insurance)

Answer 5

Total premiums @ interest rate over time
- total dividends @ interest rate over time
- cash value
= Net cost of insurance
÷ Annuity due factor
= Annual interest
- adjusted cost
÷ Units of insurance owned (e.g. $50k = 50 units)
=Result

Question 6

For the Surrender Cost Index, a client will want to know…

Answer 6

How efficiently the policy builds cash surrender value.

Question 7

Surrender Cost Index favors policies with…

Answer 7

Higher cash surrender values and to some degree, higher premiums

Question 8

How does the Net Payment Cost Index Method for calculating cost of Life Insurance work?

Answer 8

Cash inflows (dividends) are netted against cash outflows (premiums). Cash value is ignored.

Question 9

Formula for Net Payment Cost Index Method (for calculating cost of Life Insurance)

Answer 9

Total premiums @ interest rate over time
- total dividends @ interest rate over time
= Cost of Insurance (total)
÷ Annuity due factor
= Annual interest
- adjusted cost
÷ Units of insurance owned (e.g. $50k = 50 units)
=Result

Question 10

For the Net Payment Cost Index, a client will want to know…

Answer 10

The cost efficiency of the pure death benefit coverage.

Question 11

Net Payment Cost Index favors policies with…

Answer 11

Policies with higher death benefits and lower premiums

Question 12

5 independent services to look at to see if an insurance has a good rating

Answer 12

1. AM Best Company, Inc
2. Fitch Ratings
3. Weiss Research
4. Standard & Poor’s Insurance Rating Services
5. Moody’s Investor Service

Question 13

3 cost factors that influence the premium, and ultimately life insurance policy’s performance:

Answer 13

1. Mortality Costs
2. Administrative Expenses
3. Anticipated Investment Earnings