A Process for Selecting a Life Insurance Contract Abstract In the market for life insurance, individuals face many product alternatives, however, little guidance is provided in product selection other than basic descriptions of plan benefits and costs. While objective criteria are important to the purchase decision, an individual's subjective valuation of all criteria, objective and subjective, play the pivotal role. A multi-attribute life insurance contract choice model is presented to assist an individual in the problem of choosing the optimal life insurance contract conditional upon the preference set of the individual. The analytic hierarchy process is employed to structure the decision and determine the optimal life insurance contract. Introduction The selection of the best life insurance contract has been a problem confronted by researchers who have offered consumers numerical recipes to solve for the contract of best value or lowest cost. Kensicki (1974), Babbel (1978), and Babbel and Staking (1983) have used net present value analysis to measure the cost of a life insurance contract, while the interest-adjusted net payment and surrender cost indices are well known methods to evaluate a life insurance contract's projected cost.(1) There also exist a text of positive, theoretical literature that describe optimal life insurance purchasing behavior when a consumer is faced with an uncertain lifetime.(2) However, there is no decision model that integrates an individual's objectives and constraints with respect to the choice of the best life insurance product. This article posits such a decision model. The determination of an individual's optimal life insurance contract among competing contracts is resolved through the analytic hierarchy process (AHP). It is shown that the AHP, as a decision-making methodology, unifies the characteristics of life insurance contracts with an individual's preference set to create a determinate model which assists an individual in selecting a life insurance contract while considering simultaneously the ordering of all characteristics important to the individual. AHP Methodology and the Life Insurance Contract Choice Model The AHP assists an individual in a decision-making process by decomposing a problem into a hierarchic structure of objectives, criteria, and alternatives. Recently, the AHP was employed by Khaksari, Kamath, and Grieves (1989) to the asset allocation problem faced by a portfolio manager. In this article the problem introduced is the selection of the appropriate life insurance contract given a set of competing contracts from which to choose. Associated with this problem are many subjective and objective criteria important to a decision-maker. For example, the value placed on the contractual provisions within the insurance contract is subjective, while the projected interest-adjusted net payment index and cash value accumulation after n years are objective. However, comparisons among subjective and objective criteria by an individual are inherently judgmental reflecting a preference ordering after all comparisons among the criteria have been held. Thus, an individual's subjective valuation of both objective and subjective criteria is captured in the life insurance contract choice model. Multiple criteria weights are derived through the AHP by incorporating the decision-maker's judgments into an objective ratio scale through pairwise comparisons of preference orderings.(3) Structure is given to this process by the problem objective (the top level of the hierarchy), and the underlying criteria. The hierarchical structure of the multi-attribute life insurance contract choice decision is illustrated in Figure 1. In the context of life insurance contract choice, the objective is the individual's expected satisfaction with the life insurance contract which is dependent on the first level of the hierarchy: the net payment index, financial strength of the insurer, contractual features, and cash value accumulation. …