1. What is Annual Equivalent Cost (AEC)?

The Annual Equivalent Cost (AEC) is a financial metric used in insurance to calculate the uniform annual cost of a policy by considering both the premium payments and administrative costs spread over the annuity factor.

2. How Does the Calculator Work?

The calculator uses the AEC formula:

Where:

• \( Premium \) — Insurance premium amount in dollars
• \( Admin \) — Administrative costs in dollars
• \( Annuity\ Factor \) — Present value annuity factor

Explanation: The equation converts the total insurance costs into an equivalent annual amount, making it easier to compare different insurance options.

3. Importance of AEC Calculation

Details: AEC helps in comparing different insurance policies with varying premium structures and administrative costs on an annualized basis, allowing for better financial decision-making.

4. Using the Calculator

Tips: Enter premium in dollars, administrative costs in dollars, and the annuity factor. All values must be valid (premium ≥ 0, admin ≥ 0, annuity factor > 0).

5. Frequently Asked Questions (FAQ)

Q1: Why use AEC for insurance comparison?
A: AEC standardizes different cost structures into an annual equivalent, making comparison between policies easier and more accurate.

Q2: What is a good AEC value?
A: Lower AEC values generally indicate more cost-effective insurance options, though coverage benefits should also be considered.

Q3: How is the annuity factor determined?
A: The annuity factor depends on the discount rate and time period, typically calculated using present value annuity formulas.

Q4: Does AEC include all insurance costs?
A: AEC includes premium and admin costs shown in the calculation. Additional costs like deductibles or copays may need separate consideration.

Q5: Can AEC be used for different policy durations?
A: Yes, as long as the annuity factor is properly adjusted for the policy duration and time value of money.