Life Insurance Costs Research Articles

The Effect of Premium Payment Frequency on Life Insurance Cost Rankings

This paper examines the extent to which shifts in cost rankings occur between annual premium-based interest-adjusted cost indices and indices based on premiums payable more frequently than annually. The N.A.I.C. Model Solicitation Regulation and all published data use annual premiums as the basis for all calculations. Yet fewer than one in five purchasers of life insurance pay premiums annually. Thus, manipulation of annual premium-based cost figures is theoretically possible. The National Association of Insurance Commissioner's (N.A.I.C.) Life Insurance Solicitation Model Regulation and the laws of the states having any form of life insurance cost disclosure, require the consumer be given, on request or automatically, interest-adjusted cost and other information [ 13, pp. 545-552]. The Federal Trade Commission staff report also would require disclosure of life insurance costs, but based on the 20-year surrender index and Linton's rate of return pricing method [9, pp. 99-100, 153]. All the above require that costs be calculated using annual premiums. Moreover, all published data on life insurance costs use annual premiums as the basis for all calculations. Yet, as Table 1 shows, most purchasers of life insurance do not pay premiums on an annual basis. In fact, fewer than one in five currently pay premiums annually. Insurers differ in the assumptions they make in computing premiums payable more frequently than annually (hereafter called non-annual premiums) [3, pp. 152-154]. It is possible, therefore, for an insurer to illustrate a competitive cost based on annual premium payments but, by using conservative assumptions to compute more frequent premium payments, to have a high net cost if the policyowner chooses to pay premiums monthly, quarterly, or semi-annually. This paper examines a segment of the life insurance business to determine whether and to what extent shifts in cost rankings occur between interestadjusted cost indices calculated on an annual premium basis and cost indices

A Mathematical Note on Inflation, Regulation, and the Cost of Life Insurance

The influence of inflation on the cost of life insurance has received considerable attention.I While it is generally assumed that higher anticipated inflation is accompanied by a rationally perceived increasing real cost of life insurance protection (exceptions: Neumann [9] and Fortune [4]), a rigorous analytical treatment of the relationship has not been provided. Recently Babbel [1] identified an appropriate procedure for measuring inflation's impact on the cost of life insurance and then applied the technique to actual insurance policy data to demonstrate the potential magnitude of its impact [2]. Although a claim was made that under fixed insurance rates, anticipated inflation would raise the (rationally perceived) real cost of life insurance protection, no proof was presented. The purposes of this note are to present a rigorous proof of this claim, and to determine the extent to which premiums would need to be adjusted to leave the cost of life insurance unchanged. In this note, the net cost-benefit ratio suggested by Babbel will be used as a measure of the real cost'of life insurance. The effect of insurance rate regulation will be assumed to be one of maintaining at a fixed level the (nominal) terms stated in the policy (i.e., premiums, death benefit, and cash values, if any). The effect of expected inflation, therefore, will be limited to its impact upon the discount rate and upon any insurance values not specifically stipulated in the insurance contract (e.g., dividends). It is assumed that if prices are expected to rise, the discount rate will be higher, although not necessarily by the full amount of the anticipated inflation (i.e., dI/dj>O where I and j represent the discount factor and the expected rate of inflation, respectively.) The net cost-benefit ratio of a nonparticipating level premium term policy for an insured expecting to surrender his or her policy at the end of year k is given by

Inflation's Impact on Life Insurance Costs: Brazilian Indexed and Nonindexed Policies

Analytical models are applied to measure the extent of inflation's impact upon life insurance costs in Brazil, an environment characterized by endemic inflation. Indexed and nonindexed policies are examined and compared using capital budgeting valuation techniques. The analysis demonstrates that indexed policies do not fully hedge purchasing power erosion, and that financial protection available through indexed and nonindexed policies is more expensive in real terms under inflation than under stable prices. However, obtaining protection through nonindexed whole life policies is considerably more expensive than through their indexed counterparts. One of the economic institutions that is most susceptible to the effects of inflation is life insurance. In an effort to mitigate the inflation-produced erosion of values specified in life insurance contracts, several countries have adopted index-linked life insurance policies. In such contracts, the nominal values of the insurance premiums, cash values, and indemnification payments are linked to a price index and adjusted periodically in accordance with changes that have transpired in the index. This approach has been taken in countries such as Brazil, Finland, and Israel.

Measuring Inflation Impact on Life Insurance Costs

A number of methodologies generally used in comparing life insurance costs are examined, and one is identified as appropriate for measuring inflation's impact on the expected cost of life insurance. The model is used to demonstrate that anticipations of inflation are associated with higher (rationally perceived) real costs of life insurance protection when regulation impedes insurers from incorporating higher interest rates into nonparticipating policy contract terms.

Yearly Prices of Protection and Rates of Return in a System of Life Insurance Cost Disclosure

Yearly Prices of Protection and Rates of Return in a System of Life Insurance Cost Disclosure

Illustrated and Realized Policyowner Dividends: An Empirical Analysis

Two yardsticks are present to measure reliability of dividend illustrations as determined by comparing 20-year streams of dividend illustrations and dividend histories. One of these measures shows that, on the average, the present value of the stream of histories was approximately ten percent greater than the present value of the stream of illustrations. The other measure, useful for determining the accuracy of dividend illustrations, shows that, on the average, the discounted value of the 20 policy years of absolute differences between histories and illustrations equaled approximately 24 percent of the discounted value of the 20 policy years of illustrations. Determining the cost of cash value life insurance has presented many problems to consumers, regulators and academicians over the years. It would be a simple matter to calculate the cost of cash value life insurance if the cost simply equaled the premium. However, the presence of cash values, the uncertainty that exists with regard to the point in time at which the policyowner will die, and the possibility of his or her terminating the policy in some other manner creates great difficulties in attempting to determine the cost of both participating and nonparticipating cash value life insurance. An additional factor which increases the level of difficulty in calculating the future cost for a participating policy is the non-guaranteed nature of policyowner dividends.' These dividends comprise an important part of the cost calculation. As policyowner dividends are not guaranteed, the cost of a participating life insurance contract cannot be ascertained at the time the insurance policy is purchased. This situation is quite different from that which prevails when purchasing most other products. Over the past several decades, a number of life insurers have extensively Professor Palmer is now Associate Professor of Business Administration at Texas Tech University. He was on the faculty of Georgia State University when this paper was submitted. Professor Palmer holds the CLU designation and has published in the CLU Journal. He has publications by the U.S. Government Printing Office and the Educational Foundation, Inc. The author would like to express his appreciation to Steven N. Weisbart for his valuable comments on earlier drafts of this paper. 1 For a discussion of the nature of life insurance policyowner dividend illustrations, see Bruce A. Palmer, Dividend Illustrations: What Are They?, C.L.U. Jou-nal Vol. XXTX. Nno 1 (Tanuarv 1975). nn. 56-59.

Analysis of Life Insurance Cost Comparison Index Methods

Analysis of Life Insurance Cost Comparison Index Methods

Company Retention. An Unreliable Indicator of the Cost of Life Insurance to the Policyowner

Company retention is shown to be non-unique for policies with different underlying cost structures. The formulation is examined to see if it accurately reflects a policyowner's viewpoint of expected cost. An alternative is proposed which adjusts for the understatement of the protection element and overstatement of the savings element. The company retention measure devised by Joseph M. Belth and recommended by him as part of a price disclosure scheme for life insurance has been described as an indicator of what the insurance company keeps to cover its expenses and make a profit on a particular policy. The retention value is considered by its originator to be a suitable measure for assessing relative costs when making a purchase decision.' This article will show that the retention measure, if used as suggested by Belth, can be misleading and produce inconsistent-even deceptiveindications of relative cost. Specifically, it will be shown that the retention indicated for a particular policy is not necessarily unique. That is, two or more policies can have the same retention value and yet be such that a rational buyer would have definite preferences for one or another based on cost considerations alone. It will also be demonstrated that there is a bias in favor of dividend payouts as opposed to wealth accumulations through savings-a bias that can lead to nonsensical results. William C. Scheel, M.A., CPCU, is Lecturer in the Department of Risk and Insurance and Actuarial Science in the University of Wisconsin, Madison. He was previously a member of the Faculty of Business Administration and Commerce in the University of Alberta. This paper was submitted in October, 1973. 1 The retention measure is discussed both in Joseph M. Belth, Price Disclosure in Life Insurance, Wisconsin Law Review, Vol. 1972, No. 4, pp. 1054-1069; and in Belth's book, Life Insurance a Consumer's Handbook (Bloomington: Indiana University Press, 1973). Belth has described the usefulness of the retention measure in his price disclosure article as follows: [The company retention is] what the company keeps to cover its expenses and make a profit-from the policyholder's point of view. This is the difference between what the policyholder pays in (the present expected value of the premiums) and what he gets back (the sum of the present expected values of the protection element, ( 81 ) This content downloaded from 157.55.39.215 on Wed, 31 Aug 2016 05:07:21 UTC All use subject to http://about.jstor.org/terms 82 The Journal of Risk and Insurance

Consumer Valuation of Life Insurance. A Capital Budgeting Approach

The Capital Budgeting Approach has been suggested as a method whereby the consumer may estimate the cost of his life insurance, by several authors. Many cost methods include parts of a formal capital budgeting model. But none to date has treated the purchase of life insurance as a pure capital budgeting decision. This article takes the consumer's viewpoint. Assumptions of lapse are not relevant to the consumer because he faces a lapse rate of one or zero in each year depending on whether he pays his premium. For life companies, lapse rates are vital to calculate an asset share accurately. The result of the Capital Budgeting Approach is a cost method that is more easily understood by both the consumer and the agent and that fairly reflects company decisions relative to high early cash values and dividends. The value of a life insurance policy to the consumer has been a difficult concept for years. This paper analyzes the life insurance policy as a series of cash and opportunity cash flows. Capital budgeting techniques are applied to the flows in the life insurance contract to reveal for insureds a comparative value of insurance in terms of rates of return and net present values. Requisites For Cost Method Any system of life insurance cost (value) comparisons should be simple. The primary method of dissemination of cost information to the public is through life insurance agents. Agents acquire information from trade sources. In order that accurate information may be transmitted, it must be simple to survive the round-about communication process from calculation to consumer. A second goal in a cost comparison system is to reflect the time value of money. From the consumer's viewpoint, a life insurance policy is a conPeter R. Kensicki, D.B.A., C.L.U., is Assistant Professor of Finance at Ohio University. Formerly with the Georgia Department of Insurance, Dr. Kensicki is a Trustee of the Griffith Foundation for Insurance Education and is Chairman of the Board of Trustees of the Institute for Research Studies, Inc. This paper was submitted in September, 1973. The author wishes to thank the many people who have contributed their time and talent to reading and suggesting changes in this paper. While there are too many to list all, a special thanks is given to Harry Blythe, Professor of Finance, Ohio State University.

A Critique of the Interest-Adjusted Net Cost Index

The drafters of the interest-adjusted index of the cost of life insurance attempted to incorporate personal time preferences for wealth into the calculus of their index. This critique shows that the index cannot be considered truly responsive to such preferences and, as a result, is subject to manipulation. After a classification scheme is developed for analyzing the parameters of various net cost indexes, an alternative index is proposed that reflects better the underlying time preferences for wealth that most buyers of life insurance exhibit. Furthermore, the new index is shown to be suitable for the evaluation of dissimilar policies. In the first section of this article some of the underlying justifications for the recommendations made by the Joint Special Committee [7] on the measurement of the cost of life insurance are examined. Section II discusses the general class of net cost measurements of which the recommended interest-adjusted index is a member. The distinction between ex ante and ex post policy rankings is drawn, and the relevance of these forms to the choice of an underlying index is discussed. This section also shows that the interest-adjusted index is a relatively inefficient index compared to at least one other index in its class. The third section is devoted to an analysis of a general class of indexes which yield ex ante policy rankings. The rationale of

Implications of Viewing Interest Foregone as an Opportunity Cost of Life Insurance: Author's Reply

Implications of Viewing Interest Foregone as an Opportunity Cost of Life Insurance: Author's Reply

Implications of Viewing Interest Foregone as an Opportunity Cost of Life Insurance: Comment

Professor J. Robert Ferrari, in a recent article in this Journal,1 applied a rather large number of somewhat negative words and phrases to the level-price method. Examples are serious conceptual flaw (p. 256), incomplete and inconsistent (p. 256), not valid (p. 261), (p. 261), likely to be misinterpreted (p. 262), highly influenced by the arithmetic (p. 262), subject to distortion (p. 263), senous conceptual shortcomings (p. 263), error of omission (p. 263), inadequate and arbitrary (p. 263), and highly artificial (p. 263). Since the first-named co-author of this communication is responsible for the level-price method, a comment from him would seem in order.2 Further, since Ferrari has utilized certain economic theory techniques, the second-named co-author of this communication offered to assist in its preparation.

Implications of Viewing Interest Foregone as an Opportunity Cost of Life Insurance

Implications of Viewing Interest Foregone as an Opportunity Cost of Life Insurance

The Replacement Problem in Life Insurance. With Special Emphasis on Comparative Costs: Treatment of Surrender Dividends

Dr. Belth has published two papers in this Journal relating to a method of measuring the cost of life insurance to policyholders one in December, 1961 1 and the other in March, 1963.2 The following remarks relate solely to the single year attained age system, which forms the basis of both papers, and not to any extension of that system to cover periods of more than one year. In my opinion, this method of analysis, with results shown separately for each year, represents a reasonable theoretical approach to the problem of evaluating and comparing costs under different policies. In his actual application of the method, however, Dr. Belth has chosen to treat surrender dividends in a way that I consider to be erroneous. This is most regrettable, since a method, however sound in theory, cannot yield completely valid results if the basic figures are not properly determined.

Comments on "Cost of Life Insurance to the Policyowner" by Joseph M. Belth

Comments on "Cost of Life Insurance to the Policyowner" by Joseph M. Belth

A Program for SYAA Life Insurance Cost Calculation: Author's Reply

A Program for SYAA Life Insurance Cost Calculation: Author's Reply

A Program for SYAA Life Insurance Cost Calculation

A Program for SYAA Life Insurance Cost Calculation

The Cost of Life Insurance to the Policyowner. A Single Year Attained Age System

The Cost of Life Insurance to the Policyowner. A Single Year Attained Age System

Cost and Coverage of Industrial Life Insurance

Cost and Coverage of Industrial Life Insurance

On Measuring the Cost of Life Insurance

On Measuring the Cost of Life Insurance