CC—Discounted Dollars

The death benefits of a life insurance contract are often referred to as “discounted,” in the sense that payment of a relatively small yearly premium, from 1 to 5 percent of the death benefit, depending upon age and rating category, will guarantee that the full face amount will be available when needed.

In this sense, the purchase of life insurance is analogous to theleverageobtained by the individual who invests in property with a small down payment and a large mortgage. The investor expects to benefit from the future appreciation of an asset worth many times his cash investment, whereas payment of modest insurance premiums enables the insured to provide a substantial death benefit as security for his family.

WITH INSURANCE, assume that a 35-year-old insured purchases $100,000 of level death protection for his family requiring an annual premium of $1,000 per year. This purchase guarantees $100,000 of discounted dollars payable upon death at any time. Thediscountis represented by the difference between the death benefit andcumulative premiumspaid. After 20 years the discount would amount to $80,000 ($100,000 - $20,000). If our insured lives for 40 years and pays premiums totaling $40,000 there is still a discount of $60,000.