Chapter 13 Buying Life I nsurance Agenda 2 Determining the Cost - - PDF document
3/ 2/ 2015 Chapter 13 Buying Life I nsurance Agenda 2 Determining the Cost of Life Insurance Rate of Return on Saving Component Taxation of Life Insurance Shopping for Life Insurance Determining the Cost of Life Insurance 3
2
Determining the Cost of Life Insurance Rate of Return on Saving Component Taxation of Life Insurance Shopping for Life Insurance
3
1.
2.
3.
4.
4
Under the traditional net cost method, the cash value
This method does not consider the time value of money
5
6
The interest-adjusted cost method is more accurate
Two interest-adjusted cost indices: The surrender cost index is useful if the owner expects
The net payment cost index is useful if the owner
7
8
Net Premiums: Compute the FVA of the premiums Subtract the FV of the dividends Subtract the Cash Value (@ 20 yrs) Apply the discount factor Divide Net Premium by FVAD of $1 FVAD = [(1+r)/r][(1+r)T – 1] Divide by Coverage
9
1 0
Net Premiums: Compute the FVA of the premiums Subtract the FV of the dividends Apply the discount factor Divide Net Premium by FVAD of $1 FVAD = [(1+r)/r][(1+r)T – 1] Divide by Coverage
1 1
Interest-adjusted cost indices can be used to
There is a wide variation in costs indices across
Most consumers use premiums as a basis for
1 2
1 3
The Life Insurance Policy Illustration Model Act requires insurers
The goal is to reduce misunderstanding of policy values by
A narrative summary describes the basic characteristics of the policy A numeric summary shows the premium outlay, value of the accumulation
The act also prohibits certain sales practices and requires the insurer to
1 4
The annual rate of return earned on the savings
The Linton yield is the average annual rate of return
Current information is not readily available to
1 5
The yearly rate of return method is based on a formula: The information needed for the calculation is readily
1 6
1 7
1 8
Life insurance proceeds paid in a lump sum to a
The interest component of periodic payments is taxable as
Premiums are generally not deductible Dividends are not taxable, but interest on dividends retained is
If a policy is surrendered for its cash value, any gain is taxable
1 9
Proceeds from a life insurance policy are included in the
the insured has any ownership interest they are payable to the estate The proceeds may be removed from the gross estate if
The policyowner must make the assignment more than three years
2 0 A federal estate tax is payable if the decedent's taxable estate exceeds
A tentative tax on the taxable estate value is calculated The gross estate includes property you own, one-half of the value of property
The gross estate may be reduced by certain deductions, such as a marital
deduction, in determining the taxable estate
The taxable estate may be reduced or eliminated by a tax credit called a
unified credit
The amount of property exempt from taxation will increase in the future Federal estate taxes are scheduled to expire in 2010 Tax will be reinstated in 2011 unless Congress acts
2 1
2 2
2 3
Individual dies in 2010 No estate tax Basis for future tax changed Individual dies on 2011, 2012 $5M exemption, 35% tax rate 99.5% of estates are expemt Individual dies on 2013+ $1M exemption, 55% tax rate
2 4
2 5
2 7
The net single premium (NSP) is defined as the present
The NSP is based on three assumptions: Premiums are paid at the beginning of the policy year Death claims are paid at the end of the policy year The death rate is uniform throughout the year This is just an Expected Present Value calc.
For yearly renewable term insurance, the cost of each
2 8
2 9
3 0
3 1
For a five-year term policy, the cost of each
3 2
3 3
For an ordinary life insurance policy, the cost of
The net annual level premium is calculated using a
If premiums are paid for life, the premium is called a
If premiums are paid for only a temporary period, the
3 4
3 5 Under the level-premium method for paying premiums, premiums paid
The excess premiums are reflected in the policy reserve Policy reserves are a liability item on the insurer’s balance sheet that must be
The policy reserve is the difference between the PV of future benefits and the
PV of future net premiums
The policy reserve has two purposes: It is a formal recognition of the insurer’s obligation to pay future claims It is a legal test of the insurer’s solvency
3 6
3 7 The retrospective reserve represents the net premiums collected by the
The prospective reserve is the difference between the present value of
Both methods will produce the same level of reserves at the end of any
3 8
A terminal reserve is the reserve at the end of any
The initial reserve is the reserve at the beginning of
The mean reserve is the average of the terminal and
3 9