|PUA||Paid-Up Additional Insurance|
Optional PUA purchased|
with out-of-pocket money
(dividends can yield PUA also)
TCV at end of previous year: $938.10 PUA purchased previous year: -651.84 ------- TCV eligible to earn dividends: $286.26 The policy states that PUA are not eligible for dividends until the year after the PUA was purchased.
dividend: $169.85 rate 1: 169.85 / 286.26 = 59.33% rate 2: 169.85 / 938.10 = 18.11% rate 3: 9.85 / 286.26 = 3.44% Which rate seems most likely?
Paragraph from OPP Rider
Values The paid-up insurance under this rider has cash value and loan value, and is eligible for dividends. Cash values and net single premiums are based on the 1980 CSO Tables of Mortality (the male table if the insured is a male or the female table if the insured is a female). Continuous functions are used. Interest is compounded at 4%. During the policy year in which a payment is made under this rider, the cash value of paid-up insurance purchased by that payment will be limited to the amount of that payment.
I wrote NYLIC and asked what this meant. I received an informative and
personal reply. It explained that the Mortality Table applies a factor
each year to the interest earned, and the result is an almost linear
Earlier I wished they would throw the darn mortality table away. After they use it to set the age-based cost of PUA, it seemed to serve little purpose except complicate the gain calculations. As I analyzed my policy, it became clear why they cannot do so. A policyholder can sell back PUA (this money can be used to help pay premiums, for example). But when part of the PUA is sold back, my straight-forward "linearIncrease" formula (above) falls apart.
Fred the Actuary seems to know what he is doing after all, even if his "linear" is not my "linear".
In my opinion, the rider should not say, "Interest is compounded at 4%." The way I (and probably most other non-actuaries) read it, there would be interest earned on interest. The PUA Cash Value Machine would not work if this were so. Within several years, cash value would exceed death benefit. The insurance policy would no longer be considered tax deferred. For that matter, it would not be a life insurance policy any more, either. What kind of policy pays you less if you die than if you live?
Note that paid up additions earn dividends as well as LIV. If dividends are kept within the policy, they do accumulate in a compounded manner. In this case everything works, because the dividends purchase more insurance, so both cash value and death benefit increase at the same time.
6th Policy Year|
|OPP Death Benefit||$616.92||$1,620||$380.81|
|Dividend Death Benefit||$437.33||$1,275||$343.00|
from Male Chart
of OPP Rider
age cost/$1000 --- ---------- 43 327 44 337 45 348 46 359 47 370 48 381 49 393
The chart is and has been accurate for my OPP purchases. Observe that dividend PUA is noticeably less expensive. So far it has tracked at about "3.5 years" cheaper.
I believe the reason for cheaper dividend PUA involves my "mortality class". The policy was issued for a healthy non-smoker, so dividend PUA benefits from this favorable risk classification. Extra insurance purchased via the OPP rider is bought at a "standard class of risk". NYLIC cannot know if I will start smoking (I won't!) or acquire a medical condition which will reduce my life expectancy. They need to account for policyholders who start building up a lot of OPP after their health situation deteriorates.
However, the NYLIC annual policy summaries have so far illustrated that both PUA sub-accounts operate very much alike. Indeed, the nature of PUA almost forces parallel operation. The only difference observed so far is the previous point about dividend PUA being cheaper. Here I stated that the linear increase in value for PUA is guaranteed. The guarantee is explicit in the case of OPP PUA, but implicit in the case of dividend PUA.
No content within The Visible Policy has been approved,
authorized, or verified by New York Life or any of its representatives.
I have attempted to fairly and accurately portray the policy, but there are
likely to be mistakes. Over time, I shall endeavor to correct any
misinformation found herein.|