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The focus of fungible present-value analysis on the two critical components of a life-insurance policy directs attention to the areas worthy of assessment. It explains the operation of unclaimed life insurance policies in consumer-friendly terms and facilitates analysis of related issues. Consequently, the previously unfathomable subject of policy analysis becomes relatively simple and capable of intelligible discussion.
Compounding rates, after all, are comparable with other interest rates, such as those for certificates of deposit, bonds, mortgages and mutual fund annual growth rates, which are familiar to consumers. While the cost figure is a multi-period present-value aggregate, and therefore different from everyday costs, it is interpreted and used in the same way as other ordinary costs. The concept of present value can be explained by demonstrating the advantage of receiving $100 now rather than $100 in five years or, alternatively, the discounting of a 10th year's cost to a different value in each preceding year. Furthermore, if the industry were to use the fungible present-value approach, it could move beyond the simplistic disclaimer on illustrations, that the values do not reflect the time value of money, and begin to convey an understanding of a policy's distribution of costs and benefits over time.
However, this approach conveys something more important than the measurement of an illustration's compounding rate and its costs: It provides an impetus to search for information that is relevant to assessing insurers' future performance. While this approach does not eliminate uncertainty, it can facilitate informed discussion of performance. In the future, life insurance buyers, much like those who enter into other types of long-term investments and expense contracts, could have improved information about illustration assumptions, historical performance, and quality of management, implementation of new practices/strategies and the like.
Another significant advantage of fungible present-value analysis is that it can be applied to any form of cash-value life insurance, whole life, universal life, variable life, graduated premium policies and, assuming a discount rate, even to term insurance. This enables cost comparisons among many types of life insurance policies and reveals that no particular type of policy has eliminated the annual costs of mortality. Consequently, it dispenses with the seemingly simple and informative, but simply misleading, notion that there are two types of life insurance: term and whole life.
There is only one type of life insurance, but unclaimed life insurance policies have many different features and structures. Subsequently, greater consideration will be given to these features and structural differences among policies. For instance, cash-value policies' tax-deferred (and possibly tax-waived) appreciation will be valued for enabling costs to be paid with pretax dollars; universal policies' flexible premiums will or will not be attractive because of their flexibility, and issues, such as mutuality, the insurer's investment objectives and expertise and agent services, will become increasingly important.
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