Replacement of Life Insurance: Comment

Abstract

assumption for the economic justification of the entire article. No other replacement figure is given. Consequently, the entire economic justification of the paper is based on a percentage of unknown origin. No supportive material is given as to why 20 percent was chosen. The reader has no way of knowing why 20 percent is better than 10 percent or 40 percent. At the minimum it seems the author could have made a survey of life insurance companies and obtained their estimates of the magnitude of the problem or determined the volume of disclosure forms filed with several state insurance departments. This investigation would at least give one a minimum figure from which to build. This replacement percentage is just a minor problem. The real problems with the RLI article are with the methodology of the capital budgeting model. Specifically, there are three areas of concern: the discount factors used, lack of incremental cash flow analysis, and confusion between sunk costs and salvage value. The first problem that is encountered in the RLI paper is the discount factors used on the cash surrender values (CSV) of the Columbus Mutual (CM) policy on page 216. (For the reader's convenience the first three and last two years of data from the RLI article are reproduced in this comment). In Table 1 Kensicki shows a discounted value of 145.63 in the