When you are faced with myriad choices for a life insurance policy (and it seems like the salesperson is speaking a foreign language), you might use the cash accumulation method to decide which "cash value" policy is the most cost effective. Cash value means you not only get insurance coverage but you also accumulate some cash over time.
Let's say two different policies have the same death benefit (the amount your heirs will receive upon your demise) but the yearly premiums are different. You will need to make adjustments in your calculations to make sure you are comparing apples to apples when deciding which has the higher cash value. Say both policies have a face value of $300,000 at the end of 15 years. Policy A has a yearly premium of $1,500 and Policy B's premium is $1,000. You will need to subtract the two and "set aside" $500. Then apply the interest rate of 5% to the $500...that equals $25, so the total set aside is $525.
When you subtract this amount from the lower premium policy you can compare the two cash values, $300,000 for Policy A vs. $299,475 for Policy B.
Related or Semi-related Video
Finance: How is inventory managed for ca...3 Views
Up Next
What is a Cash Cow? Using the analogy of the cow who can be relied upon to produce milk regularly, the cash cow term is usually applied to a financ...
What is cash flow vs. earnings? Earnings are how much a company has made in profit after they have paid things like taxes and operating expenses. C...
What is Discounted Cash Flow? Discounted Cash Flow is a model that’s used to determine the value of an investment or company. It’s pretty compl...