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In late summer of 2001 I had my policy professionally evaluated, using CFA's Rate of Return (ROR) Service. I had already decided that my policy was operating fairly and equitably, but it seemed a good idea to get a second opinion on its performance. The basic policy was analyzed as it had been illustrated by New York Life (NYL (or NYLIC)); the report does not add-in the optional paid-up additional insurance (OPP) I have been purchasing.
The report's author, James H. Hunt, is a former Insurance Commissioner in the state of Vermont. He has given permission to place the first page of the report on my site. It follows in the bright grey box. The BBAG column was added by me to visually compare my calculations with his. Minor reformatting was performed to handle the differences between an 8.5x11- inch black and white print-out and a non-height restricted web page.
CFA'S Rate of Return (ROR) Report
An ROR calculation compares the purchase or retention of a cash value life
insurance policy to the alternative of buying annual renewable term (ART) and
investing the premium differences in a 'sidefund', perhaps a bank. The
ROR is the interest rate that, based on assumed ART rates, keeps the death
benefits of the two programs the same and equates the cash value and sidefund
at the end of the period studied. Two sets of ROR's are shown: those
based on 100% of the rates in Col.6 and those based on 110% of Col.6.
Shown above in Col's 4-10 is the development of the ROR at 100% ART for 20
years. Other ROR's computed analogously. The analysis in Col's 4-10 is
not necessarily a recommendation to buy term insurance; it is the technique
by which the internal return on the policy illustrated in Col's 1-3 is
The illustration is from 1996; NYL probably changed its dividend scale since then, although the results seem consistent with a current NYL illustration I just looked at. Note how awful the first five years are; then note how much better ROR's are prospectively once you've had the policy five years, which is evidently the case for you -- see ROR's in "Box B". The policy is well worth keeping now. Another reason to hang on is the possibility that NYL might demutualize, as MET, John Hancock, and PRU (soon) have done. This is a process in which a mutual life insurer, owned by its policyholders as NYL is, changes to one owned by stockholders and distributes free shares in the new company to policyowners.
If you've paid in more via the OPP route, that would not alter the ROR's significantly. (It is a function of ROR analysis that the higher the premium paid per $1,000 for a given age at issue, the closer will be the ROR's to the underlying interest rate in the dividend formula, the "dividend interest rate", or DIR, now something close to 7%. It is likely the DIR will be lower in future years if the economy's interest rates continue to trend down.)
As I hope you understand, the "premium offset" scheme illustrated is highly sensitive to the DIR; a rough rule of thumb is that for every 1% drop in DIR, two more premiums must be paid in cash. Here is what I tell people about this.
The illustration shows premiums being paid from policy values in year XX. By contract, premiums are payable for life [until age XX]. You should ask yourself if it makes sense to take premiums from a "tax shelter", i.e. your policy value, if they could be paid out of other resources generating taxable income, probably at lower rates (considering safety and freedom from market risk). In general, either pay premiums in full in cash, using dividends to buy paid-up additional insurance (PUA's), or, if in good health, consider the reduced paid-up (RPU) option if you definitely want to stop premiums. Under RPU, the death benefit is lowered to what the current cash value will support. In the long run if dividends are reinvested in PUA's, the death benefit and the cash values will be higher than if policy values are used to pay future premiums -- lower death benefits in the near term must mean higher in the long term if no more cash payments are made.
Box A is from policy inception. The ROR's in the short and long run are relatively low due to the high acquisition charges. Also, I note you were classified "Non-smoker". At that time, NYL must have had a "preferred NS" class, which either you didn't qualify for or which required a higher purchase amount. I have assumed you could qualify as a PNS in a new policy; if not, ROR's would be somewhat higher. Another important point: the charge to pay monthly is high, like a 17% credit card rate. If you pay monthly, switch to annual, even if you have to borrow the premium at the beginning of the policy year, then pay back the loan monthly. (Perhaps this is too much trouble.)
James H Hunt
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.|