Model Validation

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 function.

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.

       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.