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.
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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.

7 comments:

  1. Thank you for noticing New York Life’s ad for whole life insurance in the December 7, 2009 issue of Businessweek. Unfortunately, the premise of your commentary is fundamentally flawed because of an erroneous assumption made in your calculations. The footnote clearly indicates that the calculation is net of all premium obligations. For the benefit of your readers, this means that, yes, the policy required a $648 annual premium, but in our example the premium was paid using the policy’s cash value, which is explained more fully below. Therefore, there was no additional out-of-pocket payment made or required beyond the $15,000 used to start this particular policy.

    While whole life insurance doesn’t always outperform other financial assets, consumers buying from highly rated insurers can be confident that their guaranteed cash values won’t decline no matter how volatile the financial markets are. Interestingly, a just-released poll by the Insured Retirement Institute revealed that 6 out of 10 persons over 50 are not investing in the stock market. This reinforces the view of many observers that when it comes to "buy term and invest the difference,” most Americans don't do that. Of those who did, it turned out to be "buy term and lose the difference" during the financial crisis and they are leery of doing it again. For increasing numbers of people, safety and security is in today, betting on stocks is not. That is why we think this is precisely the time to remind people that whole life insurance has a savings component with guaranteed returns.

    In the future if you have a question about a New York Life product, call the company before making assumptions that may be incorrect.

    Bill Werfelman
    New York Life Insurance Company

    ReplyDelete
  2. Bill,

    Thanks for your comment Bill and I appreciate you clarifying the policy details. So you saying that the $648 is taken out of the cash value? So the policy starts with $15,000 and then the owner pays nothing whatsoever out of pocket after that? If that is the case then I did misunderstand your fine print.

    But if you pay the $648 annual premium out of the cash value then this diminishes the cash value right? Does the $645 / year come out of the cash value before or after the $22,005??

    Are there sales commissions, surrender charges or other fees related to this policy? What if I opened it in 1999 and then decided to close it in 2001? What would I have in cash value at that point? Do you have a full contract document explaining the policy in full that you have posted online for everyone to see so that nobody would get confused over your fine print in an ad and can instead read the entire policy details up front??

    You are absolutely right that cash value insurance has a return guaranteed by the insurer. That is a definite good point of cash value insurance. US treasury bonds also have guaranteed returns backed by the US government and I personally prefer treasuries for investments. I'm pretty sure treasuries have averaged better than 3.9% in the past 10 years.

    I have a personal preference for term life insurance. I'm sure NY Life has some good term life policies.

    TO be clear I have nothing against NY Life whatsoever. As far as I know they are a fine company and their insurance policies are dependable. Honestly this cash value policy looks like as good a deal as any other cash value policy I've seen.

    Jim R

    ReplyDelete
  3. Bill,

    Let me ask it this way: If I started this policy in 1999 then I'd pay $15,000 out of pocket. Then I wouldn't pay any premiums after that. If I cashed out the policy and closed it in 2009 would I get a check in cash for $22,005? Or some other value?

    Jim

    ReplyDelete
  4. Jim,
    We appreciate that you are considering revising your initial article based on our comments. To answer your question: yes, the policyholder could have cashed out the policy on 09/30/2009 and received a check for $22,005. This number was net of all expenses and premium obligations and was the sample policyholder’s actual cash value. Because the cash value of $22,005 and the IRR of 3.91% existed after all expenses and obligations had been paid, we felt comfortable making the representations contained in this advertisement. If the policyholder elects to keep the policy in-force, it will continue to grow its cash value and provide life insurance protection.

    Bill Werfelman
    New York Life Insurance Company

    ReplyDelete
  5. Bill,

    Thanks for the additional clarification. I definitely misunderstood the details on the policy premium. Your returns are right and I'll revise this article to correct my mistake.

    Jim

    ReplyDelete
  6. Jim,

    Thank you taking the time to consider the facts and for your honorable response.

    All the best in 2010.

    Bill Werfelman

    ReplyDelete
  7. is it even possible to dump 14,352 into a 50k whole life policy in the first year without it becoming a MEC? This sounds like an oversimplification to me.

    Bill, please post the policy illustration.

    ReplyDelete

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