Principles of Risk Management and Insurance, 13th Edition

Determining The Cost Of Life Insurance

The cost of life insurance is a complex subject. In general, cost can be viewed as the difference between what you pay for a life insurance policy and what you get back. If you pay premiums and get nothing back, the cost of the insurance equals the premiums paid. However, if you pay premiums and later get something back, such as the cash value and dividends, your cost will be reduced. Thus, in determining the cost of life insurance, four major factors must be considered: (1) annual premiums, (2) cash values, (3) dividends, and (4) time value of money. Two cost methods that consider some or all of the preceding factors are the traditional net cost method and the interest-adjusted cost method. Although the ...