December 8, 2009

New York Life Whole Life Policy Ad NOT Overstating Returns

I am retracting this article.

I was incorrect in my conclusion when I wrote this article originally. I originally stated that New York Life had overstated the returns on their whole life policy in an ad in Businessweek magazine. However I had mistakenly assumed that their annual policy costs were on top of the initial investment when in fact the annual premium costs were included in their calculations.

I'm leaving the original article below intact for reference, but to be clear :

The return of 3.9% stated in NY Life's ad does appear to be correct and I was wrong to declare they overstated it.

The original article as written is below.

In a recent copy of Businessweek magazine there is an ad from New York Life where they compare the average annual return on their $50,000 whole life policy and the S & P 500. They have a little bar chart they made up with the growth of their insurance on the left and the S&P 500 growth on the right. They are looking at 9/30/99 to 9/30/09. The graph shows that their insurance went from initial value of $15,000 to a cash value of $22,005 where as in the same 10 year period the S&P lost money dropping to $14,778. They say their insurance grew at a 3.91% rate and the S&P 500 is down -0.15%.

That all sounds fine but the problem is in the small print. At the end of the ad they have a paragraph full of detail and other info. They say that the policy is "purchased in1999 for a 35-year old, non smoking male; $648 annual premium plus $14,352 lump sum payment for paid up additional insurance" So its not a $15,000 investment it is instead $648 per year plus $14,352. Thats a total of $20,832 that you've put in. They claimed that 3.91% growth from $15,000 turning into $22,005. But you've paid more than $15,000. The total amount of money you've put in is $20,832. If you look at an investment of $20,832 growing to $22,005 in 10 years then thats a growth of 0.54%. [ This was an incorrect conclusion on my part, the 3.9% rate that NY Life advertised is actually right.] But to be fair you are getting $50,000 of insurance coverage at the same time. However to ignore that $648 you're spending a year is not realistic. Whole life policy premiums are very expensive. You can buy term life for much less. I did a quick quote on a $50,000 term policy on QuickQuote and there I found a 20 year term policy for $97.50 per year. So if you're paying $648 a year then thats about $550 more per year for the whole life policy. Whats the annual return on $14,352 lump sum and $550 a year if you end with $22,005? That works out to a 1.25% return. So compared to buying term life the real return for the whole life is 1.25% annually. Thats not horrible.

Bottom line that NY Life whole life policy return is much closer to what you might get in a basic savings account over the past 10 years. If you'd bought a term life policy and put your money in treasuries then you'd be ahead.

True the NY Life policy has beaten the S&P 500 in the past 10 years, but then that hasn't been hard to do. The past 10 years has been one of the worst 10 year stretches for the S&P500. You could have beaten the S&P 500 in several ways. If you go back just a couple years the S&P500 was trading about 50% more than it is today. Was NY Life bragging about the returns of their whole life policy compared to the S&P 500 then? No because the S&P 500 was beating their insurance policy by a pretty good margin at that point.

It seems like the NY Life policy isn't a bad return for a whole life policy but I do think their ad is a little bit misleading. I have yet to find a cash value life insurance policy that was a better value than simply buying term insurance and investing the difference.

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