David purchased a $100,000 participating whole life policy.The annual premium is $2,280.Projected dividends for the first 20 years are $15,624.The cash value after 20 years will be $35,260.If the premiums were invested at 5 percent interest for 20 years,the premiums would grow to $79,156.If the dividends were accumulated at 5 percent interest for 20 years,they would grow to be $24,400.The amount to which $1 deposited annually will accumulate in 20 years at 5 percent interest is $34.719.Based on this information,what is the traditional net cost per thousand per year of David's policy over the 20-year period?

Question

Quizplus · Accepted Answer

To calculate the traditional net cost per thousand per year, we need to use the Net Payment Cost Index (NCPI) formula:

NCPI = (Total premiums paid - Dividends + Interest on dividends - Cash value at the end of the period) / (Total death benefit / 1,000)

Total premiums paid over 20 years = $2,280 x 20 = $45,600
Dividends after 20 years = $15,624
Interest on dividends after 20 years at 5% = $24,400
Cash value after 20 years = $35,260
Total death benefit = $100,000

NCPI = ($45,600 - $15,624 + $24,400 - $35,260) / ($100,000 / 1,000)
NCPI = $18,516 / 100
NCPI = $185.16

Therefore, the traditional net cost per thousand per year of David's policy over the 20-year period is -$2.64 (negative means profitable). Since this policy has a negative NCPI, it means David has made a profit on this policy after 20 years.

David Purchased a $100,000 Participating Whole Life Policy