The Rate of Return on the Savings Element in Cash-Value Life Insurance

This paper explains in detail the work done by the late M. Albert Linton in life insurance rate-of-return analysis, shows the results of applying Linton's technique to a substantial amount of policy data gathered by the author, and discusses some of the ways in which Linton's results have been used in the life insurance business. The major conclusions are that life insurance companies vary widely in rate of return, calculated according to Linton's method, and that the use of Linton's studies, when the results are not qualified properly, appears to be a serious misrepresentation to the public. The different types of cash-value life insurance policies frequently are viewed as different combinations of protection and savings. For that reason, questions often arise concerning the rate of return that the poilicyholder earns on the savings element of such policies. The purposes of this paper are five: (1) to explain in detail the work done by the late M. Albert Linton in rate-of-return analysis, (2) to appily Linton's technique to certain policy data gathered by the author in connection with several life insurance price studies, (3) to compare the results obtained through rate-of-return analysis with those obtained by the author through life insurance price analysis, (4) to illustrate the importance of the assumptions underlying Linton's studies, Joseph M. Belth, Ph.D., C.L.U., C.P.C.U., is Professor of Insurance in the Graduate School of Business at Indiana University. This paper was first presented on August 27, 1968 at the annual meeting of the American Risk and Insurance Association. The calculations were performed on the CDC 3600 in Indiana University's Research Computing Center. The author wishes to acknowledge the assistance of J. Alan Lauer, Paul Paschke, and S. Travis Pritchett. However, the author alone assumes full responsibility for the views expressed in the paper and for any errors that may remain. and (5) to discuss some of the ways in which Linton's results have been used in the life insurance business.