Lifetime value refers to the present value of earnings that life insurance companies expect to earn from a group of policies over time. It helps determine the company’s solvency and profitability, and is calculated by considering the present value of all policies and projecting their future income. The frequency of determining the value varies, but it is typically done regularly to ensure the company remains solvent.
“Lifetime value” is a term often used in the insurance industry, particularly with life insurance. This term has to do specifically with the current or present value amount of earnings that life insurance company owners and investors anticipate to be earned from a group of life insurance policies over a period of time. Projecting this number is key for insurance providers, as it helps determine whether the provider will remain solvent in the long term and generate some type of profit beyond fulfilling the claims filed by customers.
Since providing life insurance is considered a current type of business, owners must project revenue streams, operating costs, and ultimately the net profit from the business effort. This process involves considering the present value of all policies currently written and projecting what type of income will be generated from those policies up to the point of settling the claims on those insurance contracts. By doing so, it’s easier to determine if new policies are being written at a pace that helps balance the payments, keeping the company solvent. It also helps determine whether the investments held by the insurer are producing a sufficient return to help support the overall business model. When this is the cause, the force value is considered positive and the supplier is very likely to stay in business.
Calculating the value of in-force policies requires identifying the current present value of in-force life policies, with an eye toward the amount of premium generated by those policies. When combined with the investment returns from those premiums, the resulting income stream can be compared to expenses and it will be possible to determine if changes need to be made to current strategies to sustain the operation. Insurance providers will typically calculate the value of the term on a regular basis, ensuring that the volume of new policies written is sufficient to offset the number of policies that have been settled since the last calculation.
The frequency of determining the force value will vary somewhat. It is not unusual for some insurance providers to project this value at the end of each billing period. Others may choose to determine this figure on a quarterly basis. The frequency is sometimes determined based on the rate of turnover from new policies to liquidated policies that occur on average per accounting month.
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