3 Key Considerations to Know Before You Replace a Life Insurance Policy

3 Key Considerations to Know Before You Replace a Life Insurance Policy

The previous discussions of the various policy comparison methods and the summary table of the common policy comparison methods suggest which of these methods is potentially suitable or evaluating replacement policies. As those discussions indicate, some of the comparison methods are not suitable for comparisons between existing and new policies, and planners may need to adjust or modify a method when applying it in certain circumstances. Even those methods planners can use to compare existing…

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A Summary of Life Insurance Policy Comparison Methods

A Summary of Life Insurance Policy Comparison Methods

The Summary of Policy Comparison Measures in the figure above should prove helpful in reviewing these methods and in deciding which should be used or how to properly overcome their flaws. Other considerations in using these techniques are listed below. 1. Remember that a policy comparison based on policy illustrations created by a source other than an insurance company’s home office may not be officially sanctioned, accurate, or complete. Demand computer printouts from the insurer’s home…

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The Baldwin Method of Comparing Life Insurance Policies

The Baldwin Method of Comparing Life Insurance Policies

The Baldwin method is a somewhat more complete variation of the Belth yearly rate of return method that seeks to cure some of the inadequacies of the previously discussed comparison methods. Perhaps its most notable feature is that it combines both rate of return with the value of the insurance actually received into one measure. It also adjusts for policy loans and for the opportunity cost of funds and incorporates tax considerations. Despite this relative…

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The Linton Yield Method of Comparing Life Insurance Policies

The Linton Yield Method of Comparing Life Insurance Policies

The Linton yield method works like this: The planner computes the rate of return that the policyowner must earn on a hypothetical (or real) side fund assuming death benefits and outlays are held equal for every year over the period being studied. The policy that should be selected according to this method is the one that has the highest Linton yield, that is, the policy that—given an assumed schedule of costs (term rates)—has the highest…

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The Cash Accumulation Method of Comparing Life Insurance Policies

The Cash Accumulation Method of Comparing Life Insurance Policies

The cash accumulation method works like this: 1. Equate outlays (much in the same manner as the equal outlay method) for the policies being compared. 2. Change the face amount of the lower premium policy so that the sum of the side fund plus the face amount equals the face amount of the higher premium policy. Note that this would yield the same result as where it is possible to set both death benefits and…

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The Equal Outlay Method of Comparing Life Insurance Policies

The Equal Outlay Method of Comparing Life Insurance Policies

The equal outlay method works like this: The client is assumed to outlay (payout) the same premium for each of the policies to be compared. Likewise, the client is assumed to purchase, in each policy under comparison, essentially equal amounts of death benefits year by year. The equal outlay method is easiest to employ when comparing flexible premium type policies (e.g. universal life) because it is easy for the insurer/agent to generate the illustration with…

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The Interest-Adjusted Cost Method of Comparing Life Insurance Policies

The Interest-Adjusted Cost Method of Comparing Life Insurance Policies

The interest-adjusted methods of comparing the cost of life insurance policies consider the fact that policyowners could have invested the money spent on premium dollars elsewhere earning some minimum after-tax return (5 percent is usually assumed.) Because a policy may terminate, either when the policyowner surrenders the policy or when the insured dies, there are two different interest-adjusted indexes to measure the cost: (1) the net surrender cost index; and (2) the net payment cost…

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The Traditional Net Cost Method of Comparing Life Insurance Policies

The Traditional Net Cost Method of Comparing Life Insurance Policies

The traditional net cost method works like this: 1. Add up the premiums on the ledger sheet over a stated period of time such as ten, fifteen, or twenty years. 2. Add up the dividends projected on the ledger sheet over the same period of time. 3. Subtract the total dividends from the total premiums to find the total net premiums paid over the period being measured. 4. Add the cash value and any “terminal…

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9 Ways that the Professionals Compare Life Insurance Policies

9 Ways that the Professionals Compare Life Insurance Policies

At best, life insurance is a very complicated product that is extremely difficult to evaluate and compare. Life insurance policies are complex amalgams of varying legal, financial, and probabilistic elements that cannot really be reduced to an all-encompassing unitary measure for comparison purposes. However, there are a number of commonly used measures or methods for policy comparison that can be of aid in evaluating purchase alternatives. Keep in mind that none of these methods does,…

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How to Read and Understand Life Insurance Policy Illustrations and Ledgers

How to Read and Understand Life Insurance Policy Illustrations and Ledgers

The policy illustration or ledger statement is the principal source of financial information regarding a new-issue policy. The separate chapters on the various types of policies provide ledger statement illustrations and describe in considerable detail what to look for in these statements. Here, we present a general overview. Understanding these ledger statements is important because the information they provide serves as the basis for the various policy comparison measures that are discussed below. The first…

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