Note 5 – Cost of Insurance Acquired

When an insurance company is acquired, the Company assigns a portion of its cost to the right to receive future cash flows from insurance contracts existing at the date of the acquisition. The cost of policies purchased represents the actuarially determined present value of the projected future profits from the acquired policies. Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits. The interest rates utilized may vary due to differences in the blocks of business. The interest rate utilized in the amortization calculation of the remaining cost of insurance acquired is 12%. The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised.

	2013		2012

Cost of insurance acquired, beginning of year	$	11,700,765	$	12,846,266

Interest accretion		1,426,703		1,564,162
Amortization		(2,491,056)		(2,709,663)
Net amortization		(1,064,353)		(1,145,501)
Cost of insurance acquired, end of year	$	10,636,412	$	11,700,765

Estimated net amortization expense of cost of insurance acquired for the next five years is as follows:

	Interest Accretion	Amortization	Net Amortization
2014	1,299,000	2,285,000	986,000
2015	1,181,000	2,088,000	907,000
2016	1,072,000	1,945,000	873,000
2017	967,000	1,806,000	839,000
2018	866,000	1,672,000	806,000