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 to evaluate a life insurance policy with a savings (investment) component. It enables Northrop Grumman employees 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 Northrop Grumman 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 for Northrop Grumman employees:
- 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.
Featured Video
Articles you may find interesting:
- 8 Tenets of Choosing a Mutual Fund
- Use of Escrow Accounts: Divorce
- Section 303 Stock Redemption Buy-Sell Agreement
- Medicare Open Enrollment Is Here: How Are Costs Changing for 2023?
- 2022 High Net Worth Tax Planning
- Policy Roadmap
- Section 179 Deductions
- Learn About the Path to Retirement
- Contemplating Change: 7 Key Factors When Considering a Transition from Your Company
- How Are Workers Impacted by Inflation & Rising Interest Rates?
- Lump-Sum vs Annuity and Rising Interest Rates
- Advice for Retirees Trying to Survive a Bear Market
- 5 Most Important Things to do Before Leaving Your Company
- Internal Revenue Code Section 409A (Governing Nonqualified Deferred Compensation Plans)
- 8 Tenets of Choosing a Mutual Fund
- Use of Escrow Accounts: Divorce
- Section 303 Stock Redemption Buy-Sell Agreement
- Medicare Open Enrollment Is Here: How Are Costs Changing for 2023?
- 2022 High Net Worth Tax Planning
- Policy Roadmap
- Section 179 Deductions
- Learn About the Path to Retirement
- Contemplating Change: 7 Key Factors When Considering a Transition from Your Company
- How Are Workers Impacted by Inflation & Rising Interest Rates?
- Lump-Sum vs Annuity and Rising Interest Rates
- Advice for Retirees Trying to Survive a Bear Market
- 5 Most Important Things to do Before Leaving Your Company
- Internal Revenue Code Section 409A (Governing Nonqualified Deferred Compensation Plans)
Interpreting the data
Once you've calculated the yearly rate of return for a policy year, consider the following interpretations proposed by this method 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: Northrop Grumman employees need to remember 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, giving her 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 Northrop Grumman employees consider purchasing a life insurance policy, they will be provided with a sales illustration (often using an interest-adjusted cost method) designed to help them 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 Northrop Grumman employees 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 Northrop Grumman employees to see how the policy they 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 for Northrop Grumman employees is that it relies 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.