Which index accounts for time value of money when comparing death benefits payable in 10 or 20 years?

Which index accounts for time value of money when comparing death benefits payable in 10 or 20 years?

• A. Replacement
• B. Traditional net cost index
• C. Interest-adjusted net cost index
• D. Buyer's guide

Answer: (C)

Time value of money matters when you compare death benefits that are payable in different future years. A dollar promised in 20 years isn’t worth the same as a dollar promised in 10 years, so you need a way to adjust those future amounts to a common point in time. The interest-adjusted net cost index does just that by applying an assumed interest rate to adjust net costs (and benefits) over time. This lets you compare policies on an apples-to-apples basis even when the death benefit would be paid at different ages. The traditional net cost index looks at costs without discounting future amounts, so it doesn’t reflect how money changes value over time. The replacement index is about whether you’re swapping policies, not about timing of benefits. The buyer’s guide is a consumer document, not a method for adjusting a policy’s upside or cost for time.

Time value of money matters when you compare death benefits that are payable in different future years. A dollar promised in 20 years isn’t worth the same as a dollar promised in 10 years, so you need a way to adjust those future amounts to a common point in time. The interest-adjusted net cost index does just that by applying an assumed interest rate to adjust net costs (and benefits) over time. This lets you compare policies on an apples-to-apples basis even when the death benefit would be paid at different ages.

The traditional net cost index looks at costs without discounting future amounts, so it doesn’t reflect how money changes value over time. The replacement index is about whether you’re swapping policies, not about timing of benefits. The buyer’s guide is a consumer document, not a method for adjusting a policy’s upside or cost for time.