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Lecture Risk management and insurance - Lecture No 32: Revision

Lecture Risk management and insurance - Lecture No 32: Revision. This chapter’s objectives are to: Buying life insurance, insurance types, life insurance clauses. | Revision Lecture No. 32 1 Buying Life Insurance 2 Determining the Cost of Life Insurance The cost of a life insurance policy is the difference between what you pay and what you get back When determining the cost of life insurance, four major factors must be considered: Annual premiums Cash values Dividends Time value of money 3 Determining the Cost of Life Insurance Under the traditional net cost method, the cash value and expected dividends are subtracted from annual premiums to obtain a net cost per year figure This method does not consider the time value of money 4 Traditional Net Cost Method 5 Determining the Cost of Life Insurance The interest-adjusted cost method is more accurate because it considers the time value of money Interest-adjusted cost indices come in two forms: The surrender cost index is useful if the owner expects to surrender the policy after some time period The net payment cost index is useful if the owner expects to keep the policy in force 6 Surrender Cost . | Revision Lecture No. 32 1 Buying Life Insurance 2 Determining the Cost of Life Insurance The cost of a life insurance policy is the difference between what you pay and what you get back When determining the cost of life insurance, four major factors must be considered: Annual premiums Cash values Dividends Time value of money 3 Determining the Cost of Life Insurance Under the traditional net cost method, the cash value and expected dividends are subtracted from annual premiums to obtain a net cost per year figure This method does not consider the time value of money 4 Traditional Net Cost Method 5 Determining the Cost of Life Insurance The interest-adjusted cost method is more accurate because it considers the time value of money Interest-adjusted cost indices come in two forms: The surrender cost index is useful if the owner expects to surrender the policy after some time period The net payment cost index is useful if the owner expects to keep the policy in force 6 Surrender Cost Index 7 Net Payment Cost Index 8 Determining the Cost of Life Insurance Interest-adjusted cost indices can be used to compare policies across insurers There is a wide variation in costs indices across insurers – it pays to shop around! Most consumers use premiums as a basis for comparison, but agents will supply cost indices 9 Whole Life Actual Historical Performance $250,000 Male Nonsmoker Preferred Class, Age 45 Policy Issued 12/31/1988. Last Day 12/31/2008. 10 Determining the Cost of Life Insurance The Life Insurance Policy Illustration Model Act requires insurers to present certain information to applicants for life insurance The goal is to reduce misunderstanding of policy values by policyowners, and reduce deceptive sales practices by agents A narrative summary describes the basic characteristics of the policy A numeric summary shows the premium outlay, value of the accumulation account, cash surrender values and death benefit The act also prohibits certain sales practices and .