Which term compares the cash values available to buyers if they surrender the policy in 10 or 20 years; does not consider time value of money?

Which term compares the cash values available to buyers if they surrender the policy in 10 or 20 years; does not consider time value of money?

• A. Replacement
• B. Group life insurance
• C. Interest-adjusted net cost index
• D. Traditional net cost index

Answer: (D)

Understanding how net cost indices treat cash surrender value and the time value of money explains why this term fits. The traditional net cost index compares what you’ve paid in premiums to the cash surrender value you’d have if you surrendered the policy after a specified period (like 10 or 20 years). It uses those nominal, future cash values and does not discount them back to today, so it ignores the time value of money. The other index, the interest-adjusted net cost index, would bring in the time value by discounting future surrender values to present value. The other options aren’t about comparing costs this way, so they don’t fit.

Understanding how net cost indices treat cash surrender value and the time value of money explains why this term fits. The traditional net cost index compares what you’ve paid in premiums to the cash surrender value you’d have if you surrendered the policy after a specified period (like 10 or 20 years). It uses those nominal, future cash values and does not discount them back to today, so it ignores the time value of money. The other index, the interest-adjusted net cost index, would bring in the time value by discounting future surrender values to present value. The other options aren’t about comparing costs this way, so they don’t fit.