The Visible Policy
Page 4, Let the Future End!
Benefits of Death
We politely call them "Life Insurance Policies", understanding they
really insure death, not life. The Death Benefits may well have a
very positive affect upon your surviving family members, but you are busy
eating maggots. Or vice-versa... With these pleasantries aside, let us
take a look down from Heaven and see what the policy might accomplish.
You can click the above curve to get a smaller version in a separate
window. This will allow you to view the graph as you read my description
below. From the top-right to the bottom-right:
There is no one right
methodology to use in comparing strategies.
This is particularly true in life insurance. What is most important?
- Death Benefit?
A definite advantage to term insurance is it costs less than permanent
insurance. Someone may choose to buy life insurance because he feels
the need to support a dependent who has limited means of earning an
income. He can buy a much higher Death Benefit with term than
permanent. Discussion about "cash value" might well be
a meaningless side issue to this person.
- Cash Value?
On the opposite end of the scale, a person may not have any dependents nor
ever expect to have any.
So why is this person buying life insurance at all? Maybe he should
not. "Buy nothing -- invest everything" might well be the logical
- Both are important?
The five strategies modeled here take the middle path -- build both
a Death Benefit and a Cash Value. There are still a wide range of
needs; saying this is an "apples-to-apples" comparison ignores that even
among apples there are Granny Smith, McIntosh,
Golden Delicious, and probably 50 more varieties as well.
There are just too many combinations to do a comparison which would
seem "fair" to everyone. Products and strategies exist which let you
emphasize the features which are important to you. For example:
Hmmm, maybe I should restate something. My policy allows my
beneficiary to keep all of its Death Benefit should I die.
(Any outstanding loans will be subtracted, though.) Due to the
"death benefit multiplier" mentioned above, the PUA is soon
worth more than the cash value.
- I stated above that a "clear advantage" of T+I is that you can keep
both the Death Benefit and all the invested dollars. There are
permanent insurance products that allow you to keep both. I understand
that this is a standard option with Universal Life.
- I could have modeled decreasing term insurance in the T+I cases.
This is what the Whole Life strategies do. But the Whole Life
strategies provide insurance up to age 100. The T+I strategies
stop buying insurance altogether at age 72. Is there a "fair" way to
model these differences? Maybe, if I chose to build 20 models.
If you know how to use spreadsheets, mine is
available for you to download
and modify as desired. Test the strategies which make sense to you.
Fred the Actuary expects me to die about age 79. But, being an actuary,
he has a backup plan in the event I should live too long.
It is a simple plan, really. Slowly force Cash Value and Death
Benefit to converge, until, at age 100, they intersect. The policy
matures at that point, and I think they send you your money and maybe an
engraved Certificate of Performance
Starting again from the top right:
- The green lines represent the OPP case.
This is the track I hope to actually follow; six years down,
53 more to go. The overfunding via OPP proves tremendously
beneficial to both Cash Value and Death Benefit.
- The orange lines represent the Extra Payments (XP) case.
The DB curve reveals payments much more clearly
than the associated CV curve. For the first 12 years,
these curves match the base policy case. Heck, they are
the base policy case until the thirteenth premium is paid
- The brown lines represent the Base Policy case.
Because dividends are not high enough to fully cover the 13th
thru 20th year premiums, both curves clearly reveal the payment
schedule. Stripping away the PUA which had been built up
in the first 12 years proves destructive to both Cash Value
and Death Benefit.
You may be wondering how hard it is to get the curves to converge like
that. It cannot be too hard, because most participating whole life
policies are designed to do the same thing.
(The age at convergence won't necessarily be 100.
Some companies sell policies which mature at age 85, for example.)
The algorithm is simple. Charge more. At age 40, the price
per $1000 of PUA is $297. At age 80, it is $797. You can see
that Cash Value never stops going up. One primary form of policy earnings
are dividends; I don't have to re-invest those in the policy, but since
I want it to be self-supporting eventually, I choose to do so. At age
80, I should be earning a lot in dividends, but the amount of Paid Up
Additional insurance it buys is not that much higher than it costs.
At age 98 it costs $972 per $1000. Fred excuses this behavior
because he says I have a higher chance of dieing at 98 than at 40.
The other primary form of earnings gain in my policy is "guaranteed value".
It goes up over policy life. Close your eyes and guess what the
guaranteed value of my $100,000 policy is scheduled to be at age 100.
No, try again. ... ...
That's right! $100,000 it is. You can open your eyes now.
So the fundamental guaranteed value equals the face value of the policy
at age 100. And the cash worth of insurance bought in addition
to face value equals its insurance value at age 100. Convergence!
Fred is a pretty smart guy, and generally nice. But one thing -- he can get
real ugly if someone tries to cross his lines prematurely.
When I first built the above chart, the convergence was occurring around
age 97. I didn't pay a lot of attention, because it happened
on the Base Policy case too (NYL's raw numbers).
Big Mistake. Fred means it when he
says 100 -- 97 is NOT "close enough".
("People died for those 'lines'!") The problem turned out to
be that the chart was displaying end-of-year Cash Values, but
beginning-of-year Death Benefits. Special columns needed to be
added to the spreadsheet for the beginning-of-year Cash Values.
Accesses since 31 May 2001
last modified 22 November 2010
© 2001 - 2010 by Rich Franzen
New model incorporated August 2002.
Rich's Home Page
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.