Life Insurance Evaluation: Belth Yearly Price of Protection Method

Created by Joseph Belth, a noted professor of insurance, the Belth yearly price of protection method is a widely used and well-regarded method of evaluating the cost of life insurance. It calculates the cost of the net death benefit of a life insurance policy in any one year. This figure (the yearly price of protection) can be used to determine whether the cost of a life insurance policy is low, moderate, or high and to compare the cost of one life insurance policy against another. The aim of the Belth method is to give an individual purchasing a life insurance policy information so that he or she can select a policy that has consistently low yearly prices.

The Formula and Figures Used in It

The yearly price of protection formula calculates the yearly price (cost) per $1,000 of protection. The figures used in the formula are as follows:

The formula itself is as follows:

(P + CVP)(1+i)-(CV+D) divided by (DB-CV)(0.001) = Yearly Price of Protection

What the Formula Means

The following is an explanation of what the formula means:

Numerator: (P + CVP) is the amount you would have to invest or save elsewhere if you no longer own the policy, having surrendered it at the end of the previous year. The amount you would have equals the cash surrender value plus the amount of premium you no longer have to pay. If you multiply this figure by (1 + i), you find out what you would have if you invested this amount at an annual interest rate of i. This letter should represent the interest rate you feel you could earn elsewhere in a similar investment. However, the figure suggested by Belth and often used in the formula is 6 percent. (CV + D) is the amount you would have at the end of the year if you do not surrender the policy. When you subtract this figure from the first part of the formula, you find out the yearly price of the life insurance. Then, you move on to calculate the yearly amount of protection in the denominator.

Denominator: By subtracting the policy’s cash value at the end of the year from the policy’s death benefit, you find out the yearly amount of life insurance protection. You multiply this figure by .001 to express it in thousands of dollars.

Calculating the Yearly Price of Protection:
When you divide the numerator (the yearly price paid for protection) by the denominator (the yearly amount of protection expressed in thousands of dollars), you determine the yearly price paid per $1,000 of protection.

Example: Lisa is 48 years old. Her annual premium (P) is $1,100 for a $100,000 whole life policy. The cash surrender value at the end of the most recent completed policy year was $4,400; the previous year, it was $3,800. The dividend for the most recent policy year was $40. The assumed interest rate is 6 percent. Here’s how the Belth yearly price of protection method would calculate the yearly price Lisa paid per $1,000 of protection:

(1,100 + 3,800) (1.06) – (4,400 + 40) / (100,000 – 4,400) (0.001) = 754.00 / 95.60 = 7.89

Using the Formula to Determine Whether a Policy Should be Replaced

The main use of the Belth yearly price of protection method is to determine whether the policy being evaluated should be replaced. After performing the calculation that determines the yearly price paid for your life insurance policy, you then refer to Belth’s table of benchmarks in order to determine whether the price of the policy you are considering is low, moderate, or high. You can then use this information to decide whether to replace the policy.

Once you’ve calculated the yearly price of protection for each policy year in the time period you have selected, compare these costs against the following scale:

Belth’s List of Benchmark Prices

Then, consider the following rules:

• If the yearly price per $1,000 of protection is less than the benchmark listed, the price of your protection is low, and you should not consider replacing your policy based on cost
• If the yearly price per $1,000 of protection is more than the benchmark listed but less than double the benchmark, the price of your protection is moderate, and you should not consider replacing your policy based on cost
• If the yearly price per $1,000 of protection is more than double the benchmark listed, the price of your protection is high, and you should consider replacing your policy

Example: After calculating the yearly price per $1,000 of her life insurance policy, Lisa compares this figure (7.89) against the benchmark table to determine whether she should replace her policy. She sees that the yearly price of her policy is more than the benchmark figure for her age group (6.50) but less than double that benchmark figure. So, according to the Belth method, she should not consider replacing her policy.

Strengths

Relatively simple to use and understand: This method, unlike various other methods, does not require the use of a computer to complete the required calculations. The calculations may be performed by the insurance company, but they can also be performed by the consumer, insurance agent, or financial planner.

Calculation is based on actual policy figures: Because the calculation is based on mostly current or past information rather than future projections, the Belth yearly price of protection calculation measures the cost of protection for a specific policy (often one the individual already owns), so it can easily be used in determining whether a policy should be replaced.

Tradeoffs

Projections may be inaccurate due to interest rate fluctuations: It’s difficult to accurately project the net cost of life insurance due to the fact that in some years interest rates vary widely. Try not to overestimate the amount of interest you might earn on an investment, and consider using the interest rate typically used by insurance companies in their calculation. No matter what interest rate you use, use it consistently—don’t vary the interest rate from one policy to the next.

The policy may look better in some years than in others: Because the Belth method calculates the cost of protection year by year, analyzing one year will not measure the true cost of protection, because the policy will inevitably look less costly in some years than in others. To make sure that the calculations fairly represent the policy cost, calculate and evaluate the policy cost for several years.

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