# Life Insurance Evaluation: Belth Yearly Rate of Return Method

**John Jastremski Presents:**

** **

**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 **return**expressed 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 of**return** 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 of**return** 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.

**Tradeoffs**

*Yearly rates of** **return** **may be inaccurate measures of policy’s performance*

One of the tradeoffs of the Belth yearly rate of **return** method is that it relies, in part, on assumptions of the yearly cost of insurance that may not be entirely realistic. However, if the rates of **return** are calculated for several years instead of just one, the results will be more **reliable**. False rates of **return** may also result when the cash value of the policy is small, so this method should not be used in this case.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of John Jastremski, Jeremy Keating, Erik J Larsen, Frank Esposito, Patrick Ray, Robert Welsch, Michael Reese, Brent Wolf, Andy Starostecki and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

John Jastremski is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Comments are closed.