Insurance Selection and Annuities - Net Payment Cost Index

How to calculate the net payment cost index:

1. Repeat steps 1a and 1b used to calculate the surrender cost index.
2. Subtract step 1b from 1a (1a - 1b = cost)
3. Repeat step 3 used to calculate the surrender cost index
4. Repeat step 4 used to calculate the surrender cost index

The calculations are similar, except step 1c of the surrender cost index is not used to calculate the net payment cost as the cash values of these policies are irrelevant.

Practice Question:
Jack has come to you with a life insurance policy (the details are listed below). He is concerned with the level of cash value and would like to hold the policy for 25 years. Using the surrender cost method, what is Jack's annual cost of owning the policy?

ABC - Life Insurance
Death Benefit $200,000
Estimated Interest 6%
Estimated Dividend Earning 6%
Annual Premium $2,000
Estimated Annual Dividend $430
Estimated Cash Value 455,000

A. 2.68
B. 3.12
C. 3.44
D. 3.24
E. 4.29

Answer: D
Step 1A; Find FV of Premiums ($116,313). Step 1B; Calculate FV of Dividends ($23,592). Step 1C; Estiamte cash value of policy in 25 years ($55,000). Step 2; Subtract estimated cash value and FV of dividends from FV of premiums ($37,721). Step 3; Find payment amount ($649). Step 4; Divide payment by number of thousands of dollars of death benefit ($649/200) = 3.24
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