Overview: Because comparing life insurance policies by premium alone ignores the time value of money and the role of dividends and cash value, regulators require two standardized cost indexes that account for these factors.

Two premium-level policies may look identical at a glance but deliver very different value over time once dividends, cash value accumulation, and the interest that could have been earned on the money are factored in. The National Association of Insurance Commissioners (NAIC) addressed this consumer protection problem by requiring insurers to calculate and disclose two interest-adjusted cost indexes in sales illustrations. Both assume a 5% annual interest rate for discounting purposes.

Net Payment Cost Index (NPCI)

The Net Payment Cost Index answers the question: If I plan to keep this policy until I die and never surrender it for cash, what does this coverage actually cost me per year per $1,000 of death benefit?

Because the index assumes the policyholder holds the policy until death, the cash surrender value is set to zero in the calculation — the policyholder never realizes it. Here is the process:

Accumulate annual premiums forward at 5% for 10 or 20 years (treated as an annuity due, since premiums are paid at the start of each year). This produces the Future Value of Premiums (FVP).
Accumulate projected annual dividends forward at 5% (ordinary annuity, since dividends arrive at year-end). This produces the Future Value of Dividends (FVD).
Compute the Net Future Cost = FVP − FVD.
Divide by the future value interest factor of an annuity due at 5% for the same period (13.207 for 10 years; 34.719 for 20 years) to find the equivalent level annual amount.
Divide by the number of thousands in the face amount.

The result is a dollar figure representing the annual cost per $1,000 of coverage, adjusted for the time value of money. A lower NPCI means a less expensive policy for a person who plans to keep it for life.

Surrender Cost Index (SCI)

The Surrender Cost Index answers the question: If I might surrender this policy for cash in 10 or 20 years, what did the coverage actually cost me, net of what I get back?

The calculation follows the same steps as the NPCI, with one critical addition: after computing the Net Future Cost in step 3, the policy's cash surrender value (and any terminal dividend) at the end of the period is subtracted. This reflects the return of accumulated savings to the policyholder.

Because the SCI subtracts the cash surrender value from the cost, it will almost always produce a lower index number than the NPCI for the same policy. A lower SCI indicates better value for a policyholder who expects to terminate the policy before death.

Choosing the right index: Use the NPCI to compare policies when the death benefit is the primary goal. Use the SCI when cash value accumulation and the possibility of surrender matter.

Worked Example: Comparing Two Policies

Consider two 20-year participating whole life policies with a $100,000 face amount. Using the 20-year annuity-due factor of 34.719 at 5%:

Policy A: Annual premium $2,200; FVD $21,000; Cash Surrender Value at Year 20 = $36,000.

FVP = $2,200 × 34.719 = $76,382
NPCI: ($76,382 − $21,000) ÷ 34.719 ÷ 100 = $15.95 per $1,000
SCI: ($76,382 − $21,000 − $36,000) ÷ 34.719 ÷ 100 = $5.58 per $1,000

Policy B: Annual premium $1,900; FVD $15,000; CSV at Year 20 = $28,000.

FVP = $1,900 × 34.719 = $65,966
NPCI: ($65,966 − $15,000) ÷ 34.719 ÷ 100 = $14.68 per $1,000
SCI: ($65,966 − $15,000 − $28,000) ÷ 34.719 ÷ 100 = $6.61 per $1,000

Index	Policy A	Policy B	Better for…
NPCI	$15.95	$14.68	Lifetime death benefit focus → Policy B
SCI	$5.58	$6.61	Surrender/savings focus → Policy A

The crossover is instructive: Policy A's higher premiums and stronger dividends produce superior cash value accumulation, making it a better deal if the policyholder eventually surrenders. But Policy B's lower premium structure makes it cheaper to maintain for life if the goal is pure death benefit protection.

FAQ

Why do both indexes use a 5% interest rate when actual interest rates differ?
The 5% rate is mandated by regulation to create a level playing field for comparison — the point is uniformity so that consumers can compare policies across companies, not to predict actual future earnings.

Can the SCI be negative?
Yes, in theory. If the cash surrender value (plus dividends) exceeds the accumulated premiums, the net cost is negative — meaning the policy essentially paid the policyholder to own it over that period. This outcome is unusual but can occur with strong dividend-paying whole life policies.