The Linton Yield Method of Comparing Life Insurance Policies

The Linton yield method works like this: The planner computes the rate of return that the policyowner must earn on a hypothetical (or real) side fund assuming death benefits and outlays are held equal for every year over the period being studied. The policy that should be selected according to this method is the one that has the highest Linton yield, that is, the policy that—given an assumed schedule of costs (term rates)—has the highest rate of return.

In essence, this method is just the reverse of the interest-adjusted surrender cost method, which holds the assumed interest rate level and solves for cost; the Linton method holds cost level and solves for interest. It should therefore be an excellent way to check the interest-adjusted method results because the two methods should rank policies virtually identically.

As demonstrated in the figure above, planners can compare dissimilar policies through the Linton yield method. Note, however, that planners must use the same term rates for each policy that the planners are evaluating or the results will be misleading. The higher the term rate that the planners use, the higher is the Linton yield that the analysis will produce—and, of course, the reverse is also true. This emphasizes the importance of using this method only for a relative comparison of policies and not to measure the “true rate of return” actually credited to the cash value of a give policy.

Computationally, the Linton yield method is a variation on the cash accumulation method. Using the cash accumulation methodology described above, the Linton yield is the rate of return that equates the side fund with the cash surrender value for a specified period of years. For example, in the cash accumulation method example above the side fund was just about equal to the cash surrender value in year ten when the side fund was invested at 6 percent. Therefore, the Linton yield for the whole life policy (assuming the YRT rates are competitive) is about 6 percent for ten years. The example in the figure above shows that the twenty-year Linton yield for this policy is 9.696 percent.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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