Use this tool to determine the true cost of a life insurance policy, adjusting for the time value of money, or solve for any single missing variable in the financial relationship.
Cost Life Insurance Calculator
The amount paid annually for the policy ($).
The length of time the policy is active (years).
The expected annual return rate on alternative investment (%) or inflation rate.
The final value of all premiums paid, adjusted for the interest rate.
Calculated Result:
Cost Life Insurance Calculator Formula:
This calculator is based on the Future Value of an Annuity Due formula, which accounts for the time value of money, assuming premiums are paid at the beginning of each period (annuity due).
Where:
- \(FV\) = Future Value of Premiums (Adjusted Cost)
- \(P\) = Annual Premium
- \(R\) = Interest Rate (as a decimal)
- \(T\) = Policy Term (Years)
Formula Source: Investopedia: Future Value of Annuity, Bankrate: Annuity Calculator Basis
Variables Explained:
- Annual Premium (P): The fixed yearly payment.
- Policy Term (T): The total number of years you will pay premiums.
- Interest Rate (R): Represents the opportunity cost—what you *could* have earned if you invested the premium instead.
- Future Value (FV): The calculated total monetary cost of the policy at the end of the term, adjusted for R.
Related Calculators:
What is Cost Life Insurance Calculator?
The “cost” of life insurance isn’t just the sum of your premiums. A true cost analysis must consider the time value of money (TVM). Every dollar you spend on a premium is a dollar you cannot invest elsewhere. This calculator uses the concept of Future Value to determine the true, opportunity-cost-adjusted expense of the premiums you pay over the policy term.
For term life insurance, the cost is simple: total premiums paid. However, this tool offers a more sophisticated view, essential for comparing financial products, especially permanent policies that often accrue cash value against the accumulated cost of premiums.
How to Calculate Adjusted Cost (Example):
- Define Inputs: Assume an Annual Premium (P) of $500, a Policy Term (T) of 20 years, and an Opportunity Cost (R) of 6% (or 0.06 as a decimal).
- Calculate the Future Value Factor: This involves solving the annuity factor: \(\frac{(1+0.06)^{20} – 1}{0.06} \approx 36.7856\).
- Adjust for Annuity Due: Since premiums are paid at the beginning of the year, multiply the factor by \((1+R)\): \(36.7856 \times 1.06 \approx 38.9927\).
- Final Calculation: Multiply the Annual Premium by the Adjusted Factor: \( \$500 \times 38.9927 \approx \$19,496.35 \). This is the Future Value of the Premiums (Adjusted Cost).
Frequently Asked Questions (FAQ):
Is the total premium paid the real cost of my policy?
No. While the total premium paid represents your out-of-pocket expense, the real economic cost (the Adjusted Cost) includes the opportunity cost—the investment returns you missed out on by paying the premiums instead of investing that money.
What value should I use for the Interest Rate (R)?
The Interest Rate should be your personal expected annual rate of return. A conservative value is often 3-5% (close to average inflation), but if you are an aggressive investor, you might use 7-10%.
Does this work for whole life or universal life policies?
It accurately calculates the Future Value of the premiums paid. For permanent policies, you would need to subtract the calculated cash value at the end of the term from this FV to determine the net adjusted cost.
Why is the “Future Value” always higher than the sum of premiums?
The sum of premiums is \(P \times T\). The Future Value (FV) is higher because it accounts for compound interest. It answers the question: “How much would my money be worth today if I had invested the premiums instead?”