Life Insurance Evaluation: Belth Yearly Rate of Return Method for PG&E Employees

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 PG&E 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 PG&E 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 PG&E 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.

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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:  PG&E 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 PG&E 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 PG&E 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 PG&E 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 PG&E 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.