Came across a few old AM questions that ask to calculate the net payment cost index / surrender cost index. Another to calculate the life insurance need for an individual.
Neither of these have “calculate” in the LOS. Any need to dive into this stuff? It’s only a page or two in the PW2 section but I have very little capacity for new formulas at this stage.
They’re pretty straight-forward and easy to remember. Highly unlikely that they’ll be in the test but a quick overview might be a good idea just in case CFAI decides to throw a curve ball.
Thanks, just went through it. Not too bad at all:
Net payment cost index:
- Calculate FV of annuity payments (@ BGN)
- Calculate FV of dividends received (@ END)
- Subtract FV of dividends from FV of annuity payments
- Calculate PMT of above net FV value
- Divide by 100
Surrender cost index: The same as above except also subtract FV of cash value which will be given.
I think you’re right that this likely won’t show up but you never know.
They had a question on it for the CFAI 2017 MCQ mock that I took the other day, so I’m going to consider it fair game. What has tripped me up on these questions that finally clicked is that you don’t divide by 100 (per the example in the CFAI text). You need to find the payment per $1,000 of insurance. So if the death benefit is $500,000, you divide the PMT by 500 to get the payment per $1,000.
And also remember to set the calc back to @BGN for the third step that produces the final net payment amount.
That said, I feel like if there is an insurance question involving a calculation, my hunch is that we’re more likely to see a question where they ask to calculate the additional value of insurance needed for an individual with either the needs-based or human life value methods.
Ahhh… thanks for pointing that out. I was doing one of the EOC questions that actually does ask to calculate the net payment cost index and they were dividing by 500. Couldn’t figure out why and I was even reading the errata to see if there was a mistake lol. Makes sense now.