The Visible Policy
Annex B, Yield!

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Introduction

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

 INSURER: NYL INITIAL FACE AMOUNT: $ 100,000 INSURANCE AGE: 42 
 POLICY: WHOLE LIFE
CLASS: MALE NONSMOKER 



Cash Value Policy
Buy Term & Invest the Difference at: 5%


Col.1 Col.2 Col.3
Col.4 Col.5 Col.6 Col.7 Col.8 Col.9 Col.10
Col.11
BBAG
(not
from
ROR
rpt)
Plcy
Year
Annual
Premium
Cash
Surrender
Value
Death
Benefit

Annual
Outlay:
Same as
Col.1
Amt of
Term Ins
C3-C8
Term
Rate
per
$1000
Cost
of
Term
Ins
Sidefund
Beg Yr
C10 +
C4-C7
Death
Benefit
Beg Yr
C5+C8
(=C3)
Sidefund
End Yr
Col.8
Acc@ 5%

Ann'l
ROR's
100%
ART

 1
 2
 3
 4
 5

 6
 7
 8
 9
10

11
12
13
14
15

16
17
18
19
20
1764
1764
1764
1764
1764

1764
1764
1764
1764
1764

1764
1764
0
0
0

0
0
0
0
0
0
160
1673
3548
5390

7603
9892
12265
14828
17497

20333
23553
24874
26364
28030

29576
31304
33020
34938
37068
 100000
 100000
 100500
 101200
 102000

 103000
 104100
 105300
 106700
 108300

 110000
 112000
 110100
 108400
 107000

 105800
 104900
 104200
 103700
 103500

1764
1764
1764
1764
1764

1764
1764
1764
1764
1764

1764
1764
0
0
0

0
0
0
0
0
98361
96643
95345
94163
92994

91934
90878
89825
88868
88006

87132
86439
83481
80675
78122

75726
73587
71604
69777
68207
0.86
0.92
0.99
1.08
1.17

1.27
1.38
1.51
1.64
1.80

1.96
2.10
2.25
2.40
2.58

2.86
3.17
3.52
3.91
4.35
125
129
134
142
149

157
165
176
186
198

211
222
228
234
242

257
273
292
313
337
1639
3357
5155
7037
9006

11067
13222
15475
17832
20294

22868
25561
26619
27725
28878

30074
31313
32596
33923
35293
 100000
 100000
 100500
 101200
 102000

 103000
 104100
 105300
 106700
 108300

 110000
 112000
 110100
 108400
 107000

 105800
 104900
 104200
 103700
 103500
1722
3526
5415
7391
9459

11623
13887
16254
18729
21315

24019
26847
27958
29119
30330

31586
32888
34236
35629
37068

-100.0%
-90.2%
-6.3%
7.8%
4.5%

8.7%
7.6%
6.9%
7.2%
6.8%

6.8%
7.7%
6.7%
7.0%
7.3%

6.5%
6.9%
6.5%
6.8%
7.1%

-100.0%
-90.9%
-13.0%
3.2%
1.5%

6.3%
5.6%
5.2%
5.7%
5.5%

5.6%
6.6%
5.6%
6.0%
6.3%

5.5%
5.8%
5.5%
5.8%
6.1%

add $40 means column for prior year


If  Policy
Kept
Average Annual ROR's mt Tax Gain
If Surr'd
mt Marginal ROR's
100% ART 110% ART

Policy Years 100% ART
 5 YEARS  A -13.4% -13.1%
0


10 YEARS 1.5% 1.7%
0
 6 THRU 10 7.3% B   PREPARED FOR: 
DATE: 
Richard Franzen
26-Sep-01
15 YEARS 4.2% 4.4%
6862
11 THRU 15 7.1%
20 YEARS 5.0% 5.2%
15900
16 THRU 20 6.8%

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 estimated.

COPYRIGHT 1984 NATIONAL INSURANCE CONSUMER ORGANIZATION  PREPARED BY: James H. Hunt, FSA
603-224-2805, eve's OK
JamesHHunt@cs.com

Mr. Franzen:

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 

Comments

Here are my comments concerning the ROR report.

  1. The Rate of Return (ROR) results are computed using an actuarially-accepted methodology known as Linton Yield.  If one has access to term-rate charts, an amount can be calculated which is very close to the actual cost of insurance (COI) within a given policy year.  Assuming COI is the only internal cost, it computes the earnings rate on the policy's cash value.  Thus, Linton Yield is a rate determined internally to the workings of the policy.

    I call my simplistic rate calculation Black Box Annual Gain (BBAG).  It assumes nothing about the inner workings of the policy.  Using the policy's cash value at the end of the year, value at beginning of year, and premium payment, it calculates a rate determined externally to the workings of the policy.

    It was interesting to compare the Linton Yield rates with the BBAG rates.  You can see that they never converge, but after 12 years an almost-fixed relationship developed between the number pairs.  Linton Yield is the better number, and it provides a standard to use when comparing cash value insurance.  BBAG is a "quick&dirty" calculation that can be used by laymen who have no access to term insurance rates and who do not have the expertise to utilize an iterative Linton Yield spreadsheet.

  2. Mr. Hunt and I have communicated a bit since he sent me the report.  I asked him about the second paragraph of his commentary ("If you've paid in more via the OPP route, this would not alter the ROR's significantly. ...")  This sentence appeared to differ from my actual results and modeled future values.  In context of his entire paragraph, though, his point was that the underlying dividend interest rate (DIR) would not vary.  I agree completely with this.

    It seems I am doing something most participating whole life policyholders do not do.  Each year I have been adding about one third to my premium payment and purchasing OPP with it.  I do this with the specific intent of increasing overall return.  Most do not purchase OPP at all; in fact it is not even an option with many companies.  (Some insurers offer something similar, but it can only be purchased at certain periods, such as every fifth policy anniversary, and only up to a certain age.)  Most customers who purchase OPP do so for an entirely different reason.  They desire to reduce the number of years that they need to pay for the premium with out-of-pocket dollars.  Then they plan to use the accumulated value within the policy plus their annual dividend to let the policy "pay for itself" sooner than it ordinarily would have.  (std disclaimer: "Dividends are never guaranteed.")  Even $100 or $200 extra dollars a year might reduce the out-of-pocket period by two years or so.  I have been paying $636 a year, and I have no intention of depleting the policy's accumulated value.

    In this context Mr. Hunt replied, probably with a smile on his face, "Well, I could have been more precise; obviously, it depends on ratio of OPP to base premium."

  3. His initial comment speculated that the NYL dividend scale had probably changed in the 5.5 years since the policy illustration was printed.  He was almost right; it hadn't changed yet, but it did drop somewhat by the time I received my next policy summary.

  4. In my opinion, the ROR Service is worthwhile.  It can be used on any cash-value life insurance policy (Whole, Universal, Variable, etc).  I paid the same $50 fee as everyone else, and I am not getting remuneration of any kind for this recommendation.


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Accesses since 27 July 2002
last modified 22 November 2010
2002 - 2010 by Rich Franzen
ROR 2001 by James H. Hunt, FSA and the Consumer Federation of America

Rich's Home Page

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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.
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