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Fungible present value analysis is called so because the use of the same rate for both compounding and discounting preserves the interchangeability or fungibility of dollars at different times within the "investment/cost system" in affordable life insurance policy. This fungibility is critically important to the accuracy and completeness of the approach. The system's compounding/discounting rate is defined as the rate of return on the insurer's investment portfolio net of allocated investment expenses: in essence, the net interest or dividend rate credited on cash value. (Although this expense allocation is logical and complies with accounting principles, the validity of fungible present-value analysis does not depend on this compliance; a gross investment rate of return could have been used, and the investment expenses could have been aggregated with the product's unique insurance-related costs.)
The accompanying whole life policy illustration uses an 8% dividend or compounding rate. Supplementing this standard summary is the cash value of an alternative investment with an identical compounding rate and tax-deferred appreciation. After 20 years, for example, the cash value of the alternative investment is $34,483 greater than the policy's. Using this difference and the 8% compounding rate as a discount rate, we calculate that the illustrated fungible present-value cost of this policy is $7,398, or, in complete FungPV notation, where it is necessary to note compounding rate and duration, costs (8% & 20)= $7,398 The illustrated FungPV costs at 10 and 30 years equal $6,164 and $8,941, respectively. In essence, these figures show the present sacrifice--the policy's internal economic opportunity cost--which a policyholder would make for the insurance protection in the illustrated scenario.
Applying fungible present-value analysis to premium streams, cash values and death benefits provides other useful insights about affordable life insurance. Discounting the 20-year stream of premiums yields $26,530, while the fungible present value of the 20th year's cash value $19equals,132. That the sum of the FungPV costs and FungPV cash value equals the FungPV premiums is neither coincidence nor tautology.
Although costs were calculated from this difference in the preceding explanation, if one were to calculate the present value of the illustrated policy's implicit annual costs by using the detailed annual cost data provided in a universal policy, one would see that this value equals the figure calculated above, with the difference. This equality is achieved because the same interest rate used in compounding the original illustration is used in discounting it. Indeed, to use a different rate for discounting than for compounding would be to impute profit or loss into the analysis. Only identical compounding and discounting rates maintain the actuarial integrity of this analysis by preserving the validity of the actuary's identity that benefits equal costs.
The fungible present-value table and graph show the allocation of premiums and their earning power to the benefits of cash value and protection in affordable life insurance policy. For instance, within this illustrated 8% compounding-rate system, the fungible present value of premiums paid for 30 years is $30,420, of which $8,941 is expensed for insurance-related costs, leaving $21,479 as the fungible present value of the future cash value. Admittedly, these are not absolute values, but rather relative, illustrated values within this investment/cost system. Consequently, a competitive assessment of these values requires substantiating and comparative information about their reasonableness, reliability, appeal and the like.
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