Embedded Value

The embedded value of a life insurance business is an estimate of the value of both its net assets and the income stream expected from policies already in force.

E = PV + NAV

where E is the embedded value,
PV is the present value of future cash flows on policies already in force and
NAV is the company's NAV with investments valued at market value.

The future profits do not include the value of policies that the company will sell in the future, only those already sold. Policies that the company can expect to sell in the future are an important component of the difference between the embedded value and the actual value of the business to investors.

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