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Life Insurence Policy Selection

Posted by Prashant Shah on September 25, 2010

Before choosing any life insurance product one must consider the following:

  1. Adequacy of coverage
  2. Cash outflow/ amount of premium
  3. Duration of need
  4. Expenses of the policy
  5. Surrender charges

However there are several methods to evaluate the various life insurance policies.

Belth Method

The Belth yearly price of protection method enables to determine whether a given life insurance policy is competitively priced based on the annual cost per Rs. 1,000 of protection.

Simply put, it weighs costs against coverage.

The Belth yearly rate of return method allows to determine whether the rate of return on the investment component of a given policy is good, fair, or poor.

Try to solve above equation with following:

Post Tax Interest Rate   = 12%

Annual Premium  = Rs. 10000

Bonus   = Rs. 15000

Death Benefit   = Rs. 10 lacs

CSV   = Rs. 5,00,000

CVP   = Rs. 4,60,000

Internal Rate of Return

Commonly used for policy evaluation purposes in business purchases of life insurance 

Surrender-Based IRR

Solves for the IRR/interest rate/yield that causes accumulated premiums (less any bonus paid)to equal the policy CV at one or more pre-selected policy durations

Typically, highly negative (with a limit of a negative 100 percent) in early years (short durations) and becomes less negative, and increasingly positive, with longer durations

Death-Based IRR

Solves for the IRR/interest rate/yield that causes accumulated “net” premiums to equal the Face Amount at one or more selected policy durations

In early years (short durations), this IRR will be very large but declines with longer durations (i.e., the longer the insured lives).


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