# Surrender Cost Index

Course: Insurance Planning

Lesson 14: Purchasing and Pricing Life Insurance

## Student Question:

The surrender cost index is so confusing in terms of what I need to know. And could you provide a definition for the annuity due factor?

*Matt*

## Instructor Response:

HI Matt,

This can be confusing. Let’s take a full step back for perspective.

- The purpose of the Surrender Cost Index is to compare costs between two or more different life insurance policies.
- We usually compare the cost of an identical policy between at least two different insurance companies, such as Principal or Guardian.

The purpose of the Surrender Cost Index method of evaluating life insurance coverage cost is to recognize that the policy’s cash value reduces the net cost of life insurance coverage.

- The calculation assumes that the cash value will be distributed at the end of a period of years. In the example, the period of years is 20.

The end result of the calculation is the average interest-adjusted cost per year.

- The annuity due factor is simply a statistical method for recognizing the time value of money in the current and future cash flows.

The lower the Surrender Cost Index, the lower the average interest-adjusted cost of life insurance coverage per year.

You are unlikely to be called upon to calculate the Surrender Cost Index on your CFP Board Exam, but you must know:

- This method recognizes the investment value of the cash surrender as a reduction of the net cost of life insurance coverage, and
- The lower the Surrender Cost Index, the cheaper the cost of life insurance coverage.

Onward and Upward,

*Bruce*