Evaluating New Life Insurance Products

By I. Richard Johnson and Paul A. Randle

In recent years, the insurance industry has developed a number of new life insurance products that promise tax deferred, high levels of return. Are these returns real and are they good investment vehicles? The authors explain the basic concepts of life insurance to put these products in their proper perspective and give an illustration of their actual internal rate of return.

The complexities of life insurance provide CPAs with an excellent opportunity to advise clients on their personal financial and investment problems. Because many current insurance products combine insurance with an investment component, proper analysis can be a daunting task.

In recent years, new life insurance products have proliferated. Single-premium life, variable life, universal life, and variable universal life, are all life insurance products that have been created in the past 15 years. These new products are largely a reaction of the insurance industry to consumer demand for investment products that carry higher rates of return than were historically earned on traditional whole-life contracts.

The success of the new products in the marketplace is evidence that promises of higher returns have been well received by insurance purchasers. These new policies now account for almost half the life insurance sold in recent years. In terms of expected return, many of the new policies are, without question, superior to their older cousins. This fact does not mean, however, that insurance purchasers should automatically sign on the dotted line. Before such products are purchased, there are at least three hard questions that should be asked and answered.

* Is this policy the best way to meet the need for insurance?

* How does this policy work in comparison with traditional life insurance contracts?

* How can the rate-of-return promised by the seller of the policy be evaluated?

Unless an independent evaluation of this issue can be made and articulated, it is unlikely the best interests of the prospective purchaser will be served by such policies. These questions are easily answered by analyzing the rate of return earned on the investment component of these products.

How Does Life Insurance Work?

The premium charged by every life insurance contract, from inexpensive term insurance, to traditional whole-life policies, to the newest universal-life contracts, must contain a mortality charge and an expense load. In addition, the premiums for many policies contain a savings increment. The premiums for term-insurance policies generally contain just the mortality charge and expense load, while the premiums for cash-value policies (sometimes called whole-life policies) contain the additional increment for savings.

Computing the Costs of Mortality

The mortality charge, which every policy must contain, is based on an estimate of the dollars that must be collected from all policyholders in a given year to pay death benefits to the policy-
holders expected to die during that year. For example, suppose a company sells a $100,000 insurance contract to each of 1,000 40-year-old males.

Table 1 (one of several mortality tables currently used by insurance companies) shows that 3.02 of those 1,000 policyholders are expected to die during their 40th year of life. The appropriate mortality charge for the first year of the policy is thus easily computed:

Expected deaths per 1,000

policyholders 3.02

x Benefit paid per death $100,000

= Total dollars required

to pay benefits $302,000

÷ Total policyholders

in age bracket 1,000

= Mortality charge per

policy holder $ 302

As can be seen from this example, the mortality charge collected by the insurance company in the first year is exactly sufficient to pay for the deaths predicted to occur in that year. Remember though, every passing year makes each of the surviving policyholders one year older. Table 1 shows that the expected number of deaths per 1,000 policyholders increases to 3.29 at age 41, causing the mortality charge for $100,000 worth of insurance to increase to $329 at that age. Similarly the cost must grow to $671 at age 50, $2,542 at age 65, and so on.

You may have also observed the mortality charge grows very rapidly at the older ages, reaching $100,000 (100% of the amount of the death benefit) by age 99. That would make the coverage very expensive at age 99, but then not many will be around to purchase insurance coverage at that advanced age. Further, since the mortality cost at age 100 equals the value of the coverage, any centenarian would be foolish to purchase coverage even if still alive.

Creating a Term Insurance Policy

Many insurance companies sell a product called "Annual Renewable Term" (or ART) insurance. This type of policy provides coverage for one year only, at which time the contract must be renewed for the next year at a new and higher premium. The annual premium for this type of policy must increase every year, of course, because of the increasing mortality cost shown in Table 1.

Some companies may charge a premium less than the expected mortality costs shown in Table 1 (which means their estimates of mortality are different than this particular table). Others charge not only the expected costs of mortality, but also add an increment (called a loading charge) to cover expenses and increase the profitability of the policy to the company.

To illustrate the wide disparity in ART charges, a comparison of the actuarial mortality costs and the actual premium charges for several ART policies is shown in Table 2. Some companies obviously require larger expense loads than others, which should cause the potential purchaser to be cautious when considering this type of insurance.

Adding an Increment for Savings

It's clear that life insurance companies don't obtain the money they invest in stocks, bonds, mortgages, and office buildings by selling ART insurance. If mortality estimates are accurate, virtually 100% of ART premiums collected in a given year must be used to pay death benefits in that year.

In fact, the insurance industry exists to borrow large amounts of money from policyholders at very low rates of interest, investing that money at higher rates of interest. The need to borrow money at rates lower than the company's investment rate is what gives rise to other types of policies. Companies would most like to borrow by selling what is often called a whole-life insurance policy, but could more accurately be described as cash-surrender-value insurance.

Example. Following is a simplified example (for only 10 years, not for an individual's whole life) of how the borrowing arrangement works. Suppose a person is 40 years of age, and wishes to purchase $100,000 in life insurance for 10 years. If he purchases an ART policy the premium costs, based on the mortality data taken from Table 1, are shown in Table 3.

The company would love to persuade the purchaser to prepay all $4,467.00 worth of premiums (the 10-year total) with a single premium of only $3,672.50 (simply the present value, at 4%, of the ART premiums). That could appeal to some because of the savings of $794.50 ($4,467.00 ­ $3,672.50) realized by the prepayment.

In fact, if the policyholder opts for the single-premium plan, the payment is simply a loan to the company at an interest rate of 4.0% per annum. Table 4 shows the principal amount of this loan, together with $794.50 in interest payments credited to the account, is exactly sufficient to pay the ART premiums. Of course, the company has not discounted the cost of the policy at all--the interest earnings of $794.50 are exactly equal to the reduction in premiums granted for paying with a single premium.

Since few insurance buyers have the desire to prepay insurance premiums in the manner shown, companies have designed more subtle alternatives to borrow from insurance purchasers. Table 3 also computes a "level premium" or "uniform annual payment" alternative to the single-premium plan, calling for payments of $435.37 per year for each of 10 years. The amount of the level premium is simply the annuity, at 4.0%, that has a present value of $3,672.50.

With this plan, it appears the cost of the insurance is being discounted by $113.30 (required ART premium cost of $4,467 minus 10 premiums of $435.37 each). In fact, as Table 4 shows, the purchaser is making small annual loans to the company in the early years of the policy, and the company is crediting the policyholder's account with interest of $113.30 on the amounts borrowed. As in the case of the single-premium policy, the company hasn't really reduced its premium charges, since the interest earnings of $113.30 are exactly equal to the reduction in premiums granted for paying with the level premiums.

In neither case does the IRS ask the policyholder to pay taxes on interest earned by the policyholder since those earnings are simply being held in reserve by the insurance company to pay future premiums. Table 4 shows the value of these savings accumulations, or reserves. Any portion of this reserve that would be returned to the policyholder if the policy is canceled is called the "cash surrender value" of the policy.

As might be imagined, life insurance companies would much rather sell a single-premium policy than a level-premium policy. Barring that possibility, however, their preference would always be to sell a level-premium policy rather than an annual renewable term policy. Either way, sales of cash-value policies allow companies to borrow from policyholders at relatively low rates of interest, but invest premiums (in excess of ART costs) at interest rates higher than those paid on the policy.

When insurance companies construct any cash-value policy, the policyholder's loans to them will generally be much greater than shown in the preceding highly simplified example. This is because the level-premium (or single premium) rates are based not on the buyer's intended holding period (10 years in the preceding example), but on the purchaser's "whole life."

In insurance circles, whole life is not a buyer's normal life expectancy (about age 74 for a 40-year old male), but life through age 100. That means any single-premium or level-premium rate always contains premium charges for years in which mortality costs are very high, even though the average purchaser will never hold the policy beyond age 74, the average age at death.

It would be more than a bit tedious to compute the whole-life premium for a policy here, though the computations are identical to those made in Table 3, but through age 100. To illustrate actual rates, however, Table 5 shows the annual premium costs for 10 different whole life policies for a 40-year old male. These premiums were taken from the most recent edition of Best's Flitcraft Compend (A.M. Best Company, Oldwick, New Jersey). This handy reference volume is available in most large public and university libraries, and shows
premiums for every life insurance product currently sold by all U.S. and Canadian companies.

As can be seen, the whole-life premium for even the least expensive whole-life policy is far in excess of the actual mortality costs (Table 1) for many years. In each year, this excess premium payment represents the purchaser's loan to the insurance company. The benefits of the interest earnings on that loan, of course, are reaped far in the future when mortality costs exceed the whole-life premium rate.

Understanding New "Investment" Life Insurance Policies

The preceding description of whole-life policies really applies to virtually all types of so-called "cash-surrender-value" insurance. The policy could be constructed in such a way as to cause the premiums to pay the entire mortality cost in, say, 10 or 20 years. Such products might be called "life paid up in 10 (or 20)" policies; or "endowment" policies. Since the level premiums for these policies will be greater than for a whole-life policy, the loan being made to
the company by the policyholder is therefore greater.

The newer products which have appeared in recent years (universal life, single-premium life, variable life) may be a little more complex (and often more confusing) than traditional cash-value policies, but in fact are exactly the same thing. Interest rates earned on new policies may (and may not) be higher than those earned on traditional policies, but the way the policies work is essentially unchanged. New wine in old wineskins, to borrow a phrase.

As we look at some of the "new" kinds of insurance, keep in mind that just like the "old" policies, their premiums must always contain a mortality cost, an expense load, and a savings increment. Because the mortality costs and expense loads are pretty much fixed, whatever flexibility a "new" policy has is because of higher returns paid on the savings portion of the policy or the willingness of the company to allow the size of the savings increment to be increased or decreased.

Universal-Life Policies

Universal life is by far the most popular of the new breed of policies. These contracts generally advertise a market rate of interest on the savings increment of the policy. What the claims really mean, is that the rate will be "market driven." That is, it will pay a higher rate of return than earned in a traditional whole-life contract, by making investments that bear higher yields. The company obviously can't pay the policyholder 100% of the return earned on invested funds, or it has lost its reason to exist. Such policies may also allow the size of premium payments to be adjusted (by increasing or decreasing the savings increment of the premium), and perhaps even allowing the face value of the insurance policy to be increased or decreased (by increasing or decreasing the premium). Some policies, in fact, provide for an automatic increase in the death benefit, with the increase paid for by the earnings on the savings portion of the policy. This is often a very poor use of earnings, since the need for insurance often declines as an insured becomes older. Thus, at the very time insurance coverage should be decreased, death benefits provided by this type of policy may automatically increase.

Because the face value (death benefit) and annual premiums of universal-life policies often fluctuate up or down from year to year, it is generally very difficult for the layman to compare the costs and benefits of competing universal-life policies in a meaningful way. And because interest rates paid by the policy may fluctuate over time, the actual returns earned on any universal-life policy will almost certainly be different than a company's advertised rate. Virtually all research regarding universal-life policies shows that actual returns, earned over time, are almost invariably lower, by a significant margin, than the rates advertised at the time the policies were sold.

James Shambo, chairman of the AICPA's personal financial planning committee, believes illustrations used by insurance companies to sell their wares are not to be trusted. "Just because a company says 'you might make this much' doesn't mean you will," said Shambo, in a recent speech to fellow CPAs. He supported this warning by referring to a special study, performed last year, that shows more than half of all rate-of-return illustrations used by insurance companies were in excess of actual investment performance.

Variable-Life Policies

Less popular than universal life, variable-life policies generally require a fixed annual premium, but allow selection from various investment alternatives for the "savings" portion of the policy. These investment options may include CDs, bonds, stocks, and even such high-risk ventures as real estate or commodity futures.

Because different investment options may be selected, variable-life policies generally offer greater investment flexibility than universal-life policies, but also expose the purchaser to potentially serious financial risks. Since the savings portion of an insurance policy is really a "reserve" for payment of future premiums, it may be inappropriate to invest that reserve in high-risk assets that carry the potential of financial loss.

Single-Premium Insurance

Single-premium policies usually offer a guaranteed interest rate on savings, and a fixed death benefit. The principal selling point for single-premium policies is the potentially high return created by the tax-deferred status of earnings on the large lump-sum loan to the insurance company. This claim can really only be analyzed on its merits. That is, will the net return earned on the investment portion of the policy exceed the return that could be earned on alternative investments? Because the costs of mortality and policy expenses are often thoroughly mixed together with the savings increment of the premium, this is often a very difficult question to answer.

What About Taxes?

The tax advantages of the new policies are referred to so frequently, and often in such glowing terms, that the actual advantages often appear greater than they are. After passage of the 1988 tax act, a nationally syndicated financial columnist wrote that the new insurance policies were "the last tax shelter available to the average man or woman." Her generous praise is more than a modest overstatement.

As a general rule, the earnings on all the new policies remain tax deferred during the years premium payments are being made, as has always been the case with cash-value life insurance. Further, as with any life insurance policy, no income tax is generally paid on earnings if death occurs. This is because the cash surrender value of a policy is always used to pay the death benefit, and the IRS does not tax death benefits of insurance policies.

If one of the new policies is surrendered before death, however, an income tax liability may be incurred on a portion of the earnings. This is because the interest earned on the policy may be in excess of what was actuarially required to pay the costs of mortality. These tax consequences are seldom discussed, little understood, and seldom considered when these products are purchased. The exact tax consequences of any specific policy should be carefully analyzed prior to purchase. The ability to deal with the tax aspects of these products, in fact, is one of the great strengths the accounting profession brings to this type of planning.

Evaluating the Promised Rate of Return. An essential element in evaluating any of the new investment-type policies is measuring the potential rate of return that will be earned. This is not a simple task, since the premium is seldom divisible into costs of mortality, expense charges, and the investment increment.

What is clear, however, is that these policies always promise two things: 1) a death benefit if the policyholder dies; and 2) a return of investment capital, including earnings, if the policyholder lives. It is therefore a relatively simple matter to divide the total premium paid into two parts: the portion used to purchase insurance and the portion allocated to the accompanying investment.

The most reasonable estimate of insurance cost is the actual ART premium for a like amount of coverage. Such premiums can be obtained from other carriers or from Best's Flitcraft Compend. The actual costs of mortality shown in Table 1 can even be used, though these rates tend to be somewhat higher than currently charged by most insurers who specialize in underwriting ART coverage.

The portion of the annual premium allocated to the investment portion of the policy can therefore be estimated by subtracting the ART premium for a like amount of coverage from the total annual premium for the policy in question.

For example, suppose the policy being evaluated carries a $100,000 death benefit, and requires a first-year premium of $2,432. If $100,000 in ART coverage could be purchased for a first-year premium of $575, the estimated investment increment of the first policy is $1,857 for the first year. Investment increments may be similarly computed for each year of the expected holding period of the policy. The expected return that accrues from the investment is not the expected death benefit, but the cash that will be returned to the policyholder when the policy is canceled.

Table 6 illustrates the simple steps that may be followed to measure the internal rate of return earned by any investment-type insurance policy using a spreadsheet program. The analysis separates mortality and expense costs from investment increments by subtracting the annual cost of pure insurance (column 5) from the total annual cost of the policy under consideration (column 4). The difference is an estimate of the annual investment increment contained in the premium. The investment returns (realized only when and if the policy is surrendered at the end of 20 years) are estimated to be $47,829.

For purposes of correct computation of IRR, note that the premium payments for each year are actually made at the beginning of the year. For this reason, the timing of the successive cash flows that represent the premium payments are shown as being made in year 0, 1, 2. . .19. The investment value of the policy is assumed to be realized at the close of the 20th policy year, and is therefore shown in the 20th year of the analysis.

This particular policy advertised a yield of 9.50%--although the term "internal rate of return" was not used by the company. As Table 6 shows, however, the actual is only 6.12%.

All data used, incidentally, are prospective. That is, the estimates of annual premiums and estimated value at surrender are projections taken from a "ledger sheet" furnished by the company. Twenty years is the normal projection period used in such ledger sheets.

The fact that such projections do not represent actual performance over time can be a serious weakness in the analysis. Actual investment results, over time, may be significantly different than estimates published at the time the policy is originally marketed. For example, during the late 1970s, when interest rates were very high, many policies projected rates of return as high as 15-17%. When interest rates subsequently dropped to single-digit levels, actual performance turned out to be significantly lower than originally projected. To see how promised returns compare with actual historical performance you should consult the "Historical Policy Data" of Best's Flitcraft Compend.

Armand dePalo, chief actuary of Guardian Life Insurance Company, agrees. Guardian recently issued a statement by dePalo that noted, "many companies with poor actual performance tend to have the best illustrations (of prospective) performance. The illustration you are looking at might be just a pretty picture."

The type of analysis done in Table 6 is nonetheless useful in that it reveals a significant disparity between the rates of return cited in sales literature and the actual IRR that will be earned if the projected returns are indeed realized. The disparities are often as large as the one illustrated in Table 6, and often incurred because companies compute investment returns before deductions of sales charges and operating expenses from investment income.

Are Investment Policies the Best Way to Buy Insurance?

After any analysis of profitability has been performed, the tough decision must still be faced of whether to purchase or reject this type of insurance coverage. Rates of return are seldom as high as promised, and alternative investments may bear equivalent or higher yields. As the decision is made, it is wise to remember several basic facts.

Alternate Tax-Deferred Investments. Many people have the opportunity to invest substantial amounts, on a tax-deferred basis, in corporate pension or profit sharing plans, Keogh trusts, SEP IRA's, 401K plans, or other tax qualified plans. Such plans may offer considerably more investment flexibility, higher return, and lower cost than can be obtained from using life insurance as the investment vehicle.

Separate Decisions. Better investment decisions are often made when investment and insurance decisions are completely separate from one another. The principal purpose of life insurance should always be risk transfer--specifically, transfer of the financial consequences of death from policyholder to insurance company. The need for this risk transfer, and the amount of financial risk that should be transferred, are needs that should be analyzed completely independently of the investment merits of any policy. Insurance should never be purchased unless there is a need for insurance; and by no means should any insurance policy be purchased solely for its investment merits.

Study and Compare. If a decision is made to buy any policy with an investment component, make certain it is carefully analyzed. Study the data furnished by the company, compare those data with historical performance results published in Best's Flitcraft Compend, measure promised vs. actual profitability, and ask tough questions. There is nothing magic about these policies, they are simply insurance plus a savings account. If the insurance is too expensive, or the return on the savings too low, you can do better elsewhere. *

I. Richard Johnson, PhD, CPA, is associate professor of Accounting at the School of Accountancy, Utah State University. Paul A. Randle, PhD, is professor of finance at Utah State University.

SEPTEMBER 1995 / THE CPA JOURNAL

Mortality Mortality

Male Male Charge per Male Male Charge per

Mortality Life $100,000 of Mortality Life $100,000 of

Age per 1,000 Expectancy Coverage Age per 1,000 Expectancy Coverage

40 3.02 34.05 $302 71 43.30 10.39 $4,330

41 3.29 33.16 329 72 47.65 9.84 4,765

42 3.56 32.26 356 73 52.64 9.30 5,264

43 3.87 31.38 387 74 58.19 8.79 5,819

44 4.19 30.50 419 75 64.19 8.31 6,419

45 4.55 29.62 455 76 70.53 7.84 7,053

46 4.92 28.76 492 77 77.12 7.40 7,712

47 5.32 27.90 532 78 83.90 6.97 8,390

48 5.74 27.04 574 79 91.05 6.57 9,105

49 6.21 26.20 621 80 98.84 6.18 9,884

50 6.71 25.36 671 81 107.48 5.80 10,748

51 7.30 24.52 730 82 117.25 5.44 11,725

52 7.96 23.70 796 83 128.26 5.09 12,826

53 8.71 22.89 871 84 140.25 4.77 14,025

54 9.56 22.08 956 85 152.95 4.46 15,295

55 10.47 21.29 1,047 86 166.06 4.18 16,606

56 11.46 20.51 1,146 87 179.55 3.91 17,955

57 12.49 19.74 1,249 88 193.27 3.66 19,327

58 13.59 18.99 1,359 89 207.29 3.41 20,729

59 14.77 18.24 1,477 90 221.77 3.18 22,177

60 16.08 17.51 1,608 91 236.98 2.94 23,698

61 17.54 16.79 1,754 92 253.45 2.70 25,345

62 19.19 16.08 1,919 93 272.11 2.44 27,211

63 21.06 15.38 2,106 94 295.90 2.17 29,590

64 23.14 14.70 2,314 95 329.96 1.87 32,996

65 25.42 14.04 2,542 96 384.55 1.54 38,455

66 27.85 13.39 2,785 97 480.20 1.20 48,020

67 30.44 12.76 3,044 98 657.98 0.84 65,798

68 33.19 12.14 3,319 99 1000.00 0.50 100,000

69 36.17 11.54 3,617

70 39.51 10.95 3,951

SEPTEMBER 1995 / THE CPA JOURNAL31

Actuarial

Mortality

Charge per

$100,000 of Annual Renewable Term Premiums

Age Coverage Company A Company B Company C

40 $302 $170 $208 $269

41 329 180 389 445

42 356 191 422 482

43 387 203 458 524

44 419 217 497 568

45 455 233 538 615

46 492 251 582 666

47 532 269 629 719

48 574 289 679 776

49 621 309 735 840

50 671 329 796 910

51 730 353 868 992

52 796 379 947 1,083

53 871 407 1,038 1,187

54 956 437 1,139 1,301

55 1,047 471 1,247 1,425

56 1,146 509 1,362 1,556

57 1,249 553 1,483 1,695

58 1,359 660 1,613 1,843

59 1,477 666 1,754 2,005

60 1,608 720 1,911 2,184

61 1,754 820 2,088 2,387

62 1,919 952 2,289 2,616

63 2,106 1,125 2,513 2,872

64 2,314 1,355 2,761 3,155

65 2,542 1,654 3,028 3,461

X2SEPTEMBER 1995 / THE CPA JOURNAL Required

$1,000 of Desired ART Single Level

Age Coverage Coverage Premium Premium* Premium**

40 $3.02 $100,000 $302.00 $3,672.50 $435.37

41 3.29 100,000 329.00 435.37

42 3.56 100,000 356.00 435.37

43 3.87 100,000 387.00 435.37

44 4.19 100,000 419.00 435.37

45 4.55 100,000 455.00 435.37

46 4.92 100,000 492.00 435.37

47 5.32 100,000 532.00 435.37

48 5.74 100,000 574.00 435.37

49 6.21 100,000 621.00 435.37

Total ART Premiums $4,467.00

* The present value, at 4.0% per annum, of all ART premiums

* The annuity, at 4.0% per annum, which is equal to $3,672.50

Single-Premium Policy

Less Savings Savings

Annual Balance Balance

Single Beginning Premium After Earnings After

Age Premium Savings Payment Premium at 4.0% Interest

40 $3,672.50 $3,672.50 -$302.00 $3,370.50 $134.82 $3,505.32

41 3,505.32 -329.00 3,176.32 127.05 3,303.37

42 3,303.37 -356.00 2,947.37 117.89 3,065.27

43 3,065.27 -387.00 2,678.27 107.13 2,785.40

44 2,785.40 -419.00 2,366.40 94.66 2,461.05

45 2,461.05 -455.00 2,006.05 80.24 2,086.30

46 2,086.30 -492.00 1,594.30 63.77 1,658.07

47 1,658.07 -532.00 1,126.07 45.04 1,171.11

48 1,171.11 -574.00 597.11 23.88 621.00

49 621.00 -621.00 0.00 0.00 0.00

Total interest earned $794.50 $794.48

Level Premium Policy

Less Premium Savings Savings

Annual Annual Addition Balance Balance

Level Premium to After Earnings After

Age Premium Payment Savings Addition at 4.0% Interest

40 $435.37 -$302.00 $133.37 $133.37 $5.33 $138.70

41 435.37 -329.00 106.37 245.07 9.80 254.88

42 435.37 -356.00 79.37 334.25 13.37 347.62

43 435.37 -387.00 48.37 395.99 15.84 411.83

44 435.37 -419.00 16.37 428.20 17.13 445.33

45 435.37 -455.00 -19.63 425.70 17.03 442.72

46 435.37 -492.00 -56.63 386.09 15.44 401.54

47 435.37 -532.00 -96.63 304.91 12.20 317.10

48 435.37 -574.00 -138.63 178.47 7.14 185.61

49 435.37 -621.00 -185.63 0.00 0.00 0.00

Total interest earned $113.28

34SEPTEMBER 1995 / THE CPA JOURNALTABLE 5

Quoted

Annual

Company Premium

A $1,692

B 2,182

C 1,729

D 1,660

E 1,382

F 1,771

G 1,760

H 1,854

I 2,137

J 2,050

Average $1,822

(1) (2) (3 (4) (5) (6) (7) (8)

Estimated

Timing Required Required Annual Net

Face of Premium, Premium, Investment Estimated Annual

Policy Value of Cash Investment ART Increment Investment Cash

Year Insurance Flow Policy Policy (4 - 5) Returns Flows

1 $100,000 0 -$2,432 -$575 $-1,857 $0 $-1,857

2 100,000 1 -2,432 -621 -1,811 0 -1,811

3 100,000 2 -2,432 -671 -1,761 0 -1,761

4 100,000 3 -2,432 -731 -1,701 0 -1,701

5 100,000 4 -2,432 -788 -1,644 0 -1,644

6 100,000 5 -2,432 -865 -1,567 0 -1,567

7 100,000 6 -2,432 -941 -1,491 0 -1,491

8 100,000 7 -2,432 -1,024 -1,408 0 -1,408

9 100,000 8 -2,432 -1,114 -1,318 0 -1,318

10 100,000 9 -2,432 -1,212 -1,220 0 -1,220

11 100,000 10 -2,432 -1,321 -1,111 0 -1,111

12 100,000 11 -2,432 -1,443 -989 0 -989

13 100,000 12 -2,432 -1,577 -855 0 -855

14 100,000 13 -2,432 -1,722 -710 0 -710

15 100,000 14 -2,432 -1,882 -550 0 -550

16 100,000 15 -2,432 -2,060 -372 0 -372

17 100,000 16 -2,432 -2,256 -176 0 -176

18 100,000 17 -2,432 -2,466 34 0 34

19 100,000 18 -2,432 -2,701 269 0 269

20 100,000 19 -2,432 -2,957 525 0 525

Cash surrender value of policy, end of year 20 0 47,829 47,829

Internal rate of return of investment 6.12%

SEPTEMBER 1995 / THE CPA JOURNAL