Definition of "Rate of return method of cost comparison"
Approach advocated by the Federal Trade Commission (FTC) in its 1979 life insurance cost disclosure report. It calculates the rate of return earned by the savings element of a life insurance policy in these steps:
- determine pure cost of protection (mortality expectation).
- determine amount of dividends paid (if it is a. participating policy).
- subtract the pure cost of protection plus dividends from the GROSS PREMIUMS paid into the policy. This is the savings element.
- the rate of return equals the interest rate at which the savings element must be accumulated in order to equal the cash value of thepolicy at some future specified time period.