Exam formulas Flashcards
- Capitalization of lost income or Capital Retention Method
– Gross/before tax
(Life Insurance Manual – section 11.2.1)
Capitalized Value = Annual income before tax / rate of return
before tax
- Capitalization of lost income or Capital Retention Method
– Net/after tax
(Life Insurance Manual – section 11.2.2.1)
Capitalized Value = Annual income after tax / rate of return
after tax
This requires the following additional equation:
a) After tax rate of return = Rate of return x (1 – Tax
Rate)
- Capitalization of lost income or Capital Retention Method
– Gross/before tax with inflation
(Life Insurance Manual 11.2.2.2)
Capitalized Value = Annual income before tax / inflationadjusted rate of return before tax
This requires the following additional equation:
a) Inflation adjusted rate of return before tax = ((1 +
return) / (1 + inflation rate)) - 1
- Capitalization of lost income or Capital Retention Method
– Net/after tax with inflation
(Life Insurance Manual 11.2.2.3)
Capitalized Value = Annual income after tax / inflation adjusted rate of return after tax
This requires the following additional equations:
a) After tax rate of return = Rate of return x (1 – Tax
Rate)
b) Inflation adjusted rate of return a
CAPITAL NEEDS / CAPITAL RETENTION APPROACH
Capital Needs = cash needs + capitalized income shortfall
Capitalized income shortfall includes the Capital Drawdown
Method if necessary.
This requires the following additional equations:
a) Cash needs = assets – final expenses – tax liabilities –
debts – estate expenses – emergency fund –
education fund – estate equalization – charitable
bequests
b) Capitalized Income shortfall = (expenses – income) /
investment return
c) Capital Drawdown method = annual income shortfall
x # of year
Basic life:
face amount of the policy + extras, as entitled – policy loan
and interest to date of death – outstanding premiums = net
death benefit
Accidental Death Benefit (ADB) rider:
face amount x 2 = ADB benefit
Disability
((earned income+ unearned income) x 60% - unearned
income )) / 12 = monthly disability income benefit
Residual disability:
(pre-disability income – income earned) / pre-disability income
= residual benefit
Group:
STD: annual salary x 60% or 66 2/3% / 12 = monthly benefit
LTD: annual salary x 60% (employee-paid premium) or 75%
(employer-paid premium) / 12 = monthly benefit
Single deductible:
claim ($) – deductible ($) = reimbursement ($)
Co-insurance:
claim ($) x co-insurance (%) = reimbursement ($) e.g. if claim =
$250; coinsurance = 90%; then: $250 x 90% = $225
reimbursement
Deductible + coinsurance
claim ($) – deductible ($) = net claim ($) x co-insurance (%) =
reimbursement ($)
Family deductible:
claim ($) – (family deductible [$] – single deductible [$] already
paid) = reimbursement ($)
Interest
interest income x investor’s marginal tax rate (MTR) = tax on
interest income
