Comparing Life Insurance Policy Costs

Life insurance cost comparison methods are used to evaluate the cost of one life insurance policy in relation to another so that consumers can be better informed when shopping for the most competitively priced offering for their particular needs. Although the cost of life insurance depends largely upon an individual's specific circumstances and requirements, cost estimates are nonetheless useful so that the consumer has the opportunity to consider every factor when making a buying decision.

When evaluating different policies, it's not enough to simply compare premiums. A lower premium does not automatically mean a lower-cost policy. To that extent, cost indexes have been developed to help in the process of measuring an insurance policy's actual cost. These indexes use compound interest factors to produce "interest-adjusted" cost and payment figures.

Policy illustration information normally includes a Surrender Cost Index and a Net Payment Cost Index. These two indexes show average annual costs and payments per \$1,000 of coverage on a basis which recognizes that \$1 payable today is worth more than \$1 payable in the future (in other words, inflation is taken into consideration). They also assume that the insured individual will live and pay premiums for a particular period of years. Most insurance companies provide these index numbers on both a guaranteed and an illustrated basis.

The Surrender Cost Index, also known as the Traditional Net Cost Method, uses a complicated calculation formula, but the basic process works in this manner: the policy's premiums and dividends are accumulated over a period of years (ten or twenty, for example) at an assumed annual rate of interest, often four- or five percent. The total accumulated dividends are then added to the policy cash value at the end of the period, and this total is subtracted from the accumulated premium payments. In other words, the projected total cash value of the policy at some point in the future is subtracted from the total premium payments accumulated to that same future point, in order to determine how much the policy actually costs. This net cost is then averaged over the number of years in the period to arrive at the average cost-per-thousand for a policy that is surrendered for its cash value at the end of the period.

The Net Payment Cost Index, also called the Interest-Adjusted Cost Method, is determined in the same manner as the Surrender Cost Index; with the exception that it doesn't assume that the policy will be surrendered at the end of the period. The same formula is used, but the cash value element is omitted. Instead, this index provides an estimate of the average annual out-of-pocket net premium expenditure, again adjusted for the time value of money.

Cost indexes can be quite valuable when shopping for life insurance. It's important, however, to understand that when using them, the consumer should compare index numbers only for similar types of plans and only for the category of policy appropriate for the consumer's age and the amount that he or she intends to buy. Additionally, policy features and customer service should also be weighed, because such advantages or disadvantages could serve to offset small differences in index comparisons. In short, cost index comparisons – as well as various other elements – must be objectively considered when choosing the best policy for your premium dollar.