Life Insurance Evaluation: Belth Yearly Rate of Return Method

What is the Belth yearly rate of return method?

Created by Joseph Belth (who also created the Belth yearly price of protection method), the Belth yearly rate of return method is a way of evaluating a life insurance policy with a savings (investment) component. It enables you to measure the yearly rate of return you’re getting on your investment so that you can determine whether this rate of return is reasonable.
The Belth yearly rate of return formula
The formula and the figures used in it

The yearly rate of return method calculates the rate of return you’re getting annually on the savings (investment) component of your life insurance policy. The figures used in the formula are the same as those used in the Belth yearly price of protection method, although their meanings differ slightly:

 YPT The assumed yearly price per \$1,000 of protection P The annual premium D The annual dividend CV The cash surrender value at the end of the year DB Death benefit CVP The cash surrender value at the end of the preceding year i The yearly rate of return on savings component, expressed as a decimal

The formula itself is as follows:

 i = (CV + D) + (YPT)(DB – CV)(.001) – 1 / (P + CVP)

To complete the calculation, you’ll also need to refer to Belth’s list of benchmark prices:

 Age Price Under age 30 \$1.50 30-34 2.00 35-39 3.00 40-44 4.00 45-49 6.50 50-54 10.00 55-59 15.00 60-64 25.00 65-69 35.00 70-74 50.00 75-79 80.00 80-84 125.00

What the formula means

The following is an explanation of what the formula means:

• Numerator: (CV + D) is the amount of cash value at the end of the year (including dividends). To find the value for YPT, refer to the list of benchmark prices and choose the price that corresponds with your age. This is the assumed yearly price per \$1,000 of protection. Then, multiply this figure (YPT) by the yearly amount of life insurance protection expressed in thousands of dollars (calculate this by subtracting the policy’s cash value at the end of the year from the policy’s death benefit, DB – CV multiplied by .001). Next, add the result of the first part of the formula to the result of the second part of the formula. Then, move on to calculate the denominator of the formula.
• Denominator: (P + CVP) is the annual premium plus the cash value at the end of the preceding year. Once you’ve calculated this, you can calculate the yearly rate of return for the policy.

Calculating the yearly rate of return

Divide the numerator by the denominator, then subtract 1. This will give you the rate of returnexpressed as a decimal. To convert this into a percentage, move the decimal point two places to the right.

Example(s): Lisa is 48 years old. Her annual premium (P) is \$1,100 for a \$100,000 whole life policy. The cash surrender value of her policy at the end of the most recent completed policy year was \$4,400; the previous year, it was \$3,800. The annual dividend for the most recent policy year was \$40, and she uses the list of benchmark prices to determine the assumed yearly price per \$1,000 of protection. She wants to find out if the rate of return she’s receiving on the savings component of her policy is reasonable. Here’s how the Belth yearly rate of return method would calculate her rate of return:

i = (4,400 + 40) + (6.50)(100,000 – 4,400)(.001) – 1 / (1,100 + 3,800)

i = 5061.40 -1 / 4900

i = 1.032 – 1

Thus, i = .032, or 3.2%.

This is Lisa’s rate of return on the policy for that year.
Interpreting the data

Once you’ve calculated the yearly rate of return for a policy year, consider the following interpretations proposed by Belth to determine whether your rate of return is good, fair, or poor.

If the yearly rate of return calculated is around 6 percent or more, the rate of return is good. If the yearly rate of return calculated is around 5 percent or more, the rate of return is fair. If the rate ofreturn is around 4 percent or less, the rate of return is poor.

Caution: Remember, however, that calculating the yearly rate of return for only one year is not an accurate measure of the policy’s performance over time. Calculate the rate of return for several years at least.

Example(s): After calculating the yearly rate of return on the policy, Lisa is disappointed that her rate of return is poor. However, she continues to calculate the rate of return for an additional four years and realizes that her rate of return exceeds 5 percent in every other year–a fair rate of return overall.
Strengths
Calculation is simple

The Belth yearly rate of return calculation is easily completed, once you have the information you need at hand. The method can be completed by consumers, insurance professionals, and financial planners, without the help of a computer.
Useful as a tool to measure independently the savings component of a cash value life insurance policy

When you consider purchasing a life insurance policy, you will be provided with a sales illustration (often using an interest-adjusted cost method) designed to help you evaluate a policy’s cost of protection, which often assumes an interest rate of 6 percent. The Belth yearly rate ofreturn method, however, allows you to independently determine the yearly rate of return on the policy rather than relying solely on insurance company calculations. If performed for more than one year, this method can allow you to see how the policy you own or are considering may perform over time.