The Room 208 Blog

Value analysis plays an important role in life insurance policy. Fungible present-value analysis begins with the observation that if the same stream of premium dollars invested in a life insurance policy were put into an investment vehicle earning at the same annual compounding rate and having the same tax advantages, the cash value in the alternative investment would exceed the policy's cash value because of the cost of the life insurance component. Life insurance, after all, requires annual mortality charges to cover death claims and typically involves higher setup costs, such as underwriting expenses and larger sales loads. Value analysis states that the total of these life insurance costs is best understood by examining the difference between these future cash values-the policy's and the alternative investment's-and expressing it as a present value by using the compounding rate as a discount rate.