How Do Life Insurance Cost Indexes Work?

Written by S. Arteta and Fact Checked by The Law Dictionary Staff  

Life insurance cost index is a tool used to determine or compare the relative costs of similar policies based on several factors such as premiums, cash values and dividends. Life insurance cost index uses variables to produce an easily comprehensible comparison.

There are two kinds of insurance cost index: (1) surrender cost index and (2) net payment cost index.

Surrender cost index is important if the cash value levels are the most significant feature that one is considering in availing for life insurance. This index helps the individual to compare costs if he would choose to surrender the policy in the future and to collect the cash value.

Net payment cost index, on the other hand, is useful if one's primary concern is the amount of death benefits provided in the policy. It is helpful in comparing future costs, such as in 10 to 20 years, if one will continue to pay premiums and do not take the policy's cash value.

Generally, a smaller cost index means that a policy is a better buy. This applies only in comparing similar policies. The following tips are helpful in using life insurance cost index:

  1. Cost comparison index must only be used in comparing similar life insurance policies since these policies provide the same benefits and require almost the same premiums for the same period of time. Cost comparison index is more reliable and efficient is the policies being compared are more similar.
  2. In comparing insurance cost index, it is advisable to compare insurance policies which applies to same age and amount of insurance that the applicant intends to buy.
  3. If the result of the comparison renders a small difference in the index numbers between the policies compared, take into consideration the other features of each policy such as riders, benefits, return of premiums and others.
  4. Choose insurance policies which offers affordable premiums based on the earning capacity of the applicant. It is also a must to understand the terms of the policy such as cash value, dividends, and death benefits.
  5. Life insurance cost index must only be used to apply for new policies and not to know if the applicant must surrender an existing insurance policy. If the result of the comparison revealed a suggestion for replacement of insurance policy, it is better to ask for information from the company that issued the present policy before surrendering the same to the insurer.

 

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