What is the 'Yearly Price Of Protection Method'

The yearly price of protection method is used by actuaries in the insurance industry to find out the cost of protection of a life insurance policy that includes a savings component, such as a cash value life insurance policy. The calculation gives an estimate of the cost in any given year of the net death benefit of the policy that the insurer would have to pay out.

BREAKING DOWN 'Yearly Price Of Protection Method'

Insurers view any policies that are paid out as a cost, since they require the insurer to distribute funds to the policyholder or the policyholder's estate. The yearly price of protection method helps insurers establish an estimate of the cost of life insurance plans they have written that include a savings component. An example of this type of policy is a cash value life insurance policy. In this type of plan, part of the policyholder's premium is allocated to a savings account that earns a modest amount of interest. In the event of death, the insurer must pay out both the life insurance benefit as well as the accumulated value of the savings account component of the policy.

Calculating the Yearly Price of Protection

The cost to the insurer of a life insurance policy with a savings component is based on the cash value at the beginning of the year. Any premiums paid for that year are added to the initial cash value. The sum of these two components is then multiplied by an assumed interest rate factor of (1+i). This interest rate factor is determined by the insurer, and represents the rate of return on the savings account portion of the policyholder's insurance plan. The result of this calculation provides the forecasted cash surrender value of the policy. Add any dividends that will be paid for the year. Divide this total by the face value of the policy minus the year-end cash surrender value. This gives the yearly price of protection for the policy.

  1. Variable Life Insurance

    Variable life insurance is permanent life insurance product with ...
  2. Adjustment Provision

    Adjustment Provision in a life insurance policy that allows it ...
  3. Add To Cash Value Option

    An add to cash value option is a life insurance policyholder's ...
  4. Term Life Insurance

    Term life insurance is a type of life insurance that guarantees ...
  5. Insurance

    Insurance is a contract (policy) in which an insurer indemnifies ...
  6. Traditional Whole Life Policy

    A traditional whole life policy is a type of life insurance contract ...
Related Articles
  1. Financial Advisor

    Getting Life Insurance in Your 20s Pays Off

    Find out how Americans in their 20s can benefit from a well-thought-out life insurance policy, especially if they are able to build cash value for retirement.
  2. Personal Finance

    The Best Life Insurance for Military Families

    Two of the most common types of life insurance are term and whole life. Here's why the latter isn't a good idea for most military families.
  3. Financial Advisor

    Buying a Life Insurance Policy? Read This First

    Knowing who needs life insurance, how it works and the different types of insurance can help consumers make informed decisions about this product.
  4. Insurance

    How Much Life Insurance Should You Carry?

    Before purchasing life insurance it is important to decide if you really need it, what type of policy is best, and how much coverage you should get.
  5. Insurance

    Life Insurance: putting a Price on Peace of Mind

    Would your death leave loved ones financially stranded? Find out how to ease your mind and keep them protected.
  6. Insurance

    How to Protect Your Income No Matter What

    What does it mean to insure your income? Here are a variety of ways to do it and some insights into when it might make sense to invest in income insurance.
  7. Insurance

    What's Better: Whole Life or Term Insurance?

    Life insurance can be a difficult decision to make, especially for a young adult. Here's a look at the benefits and costs of getting whole life insurance.
  8. Insurance

    Life Insurance: How To Get the Most Out Of Your Policy

    There are many benefits to owning a life insurance policy - if you get the right one for you.
Trading Center