The Visible Policy
Page 6, Deflate This!

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Ride the Wave!

So, is there some other way to represent dissimilar data?  A way that allows comparison on both a localized and a global level?  (There better be, or this is going to be a short section!)  How about comparing the dissimilar things with something else -- something you understand as a valid reference for all sets of information involved?  Ladies and gentlemen, step inside -- become -- the Wave of Inflation, and see how the investments look from its perspective:
Cash Value Relative to Inflation, 42-99
Inflation Wave Ratio (IWR CV)

The Black Box Annual Gain curve showed one personality aspect for the investment strategies, this curve shows another.  Instead of focusing on the year-to-year gains, this view steps back and watches how the total investment is doing in terms of real value.  If the investment is at the 0% line, it is keeping up with inflation.  A loaf of bread may cost more 20 years from now, but investments that keep up with inflation have the added value to pay for this increase without noticing.  Investment strategies which map above the 0% line are gaining real value.  In a sense, that loaf of bread is getting cheaper, even though its cost is going up.  Here is the formula for Inflation Wave Ratio, Cash Value:

totalCashValue - totalInflatedCost
-----------------------------------
totalInflatedCost

Let us look at each strategy, beginning again from the top right.  Click the curve above to get a smaller version in a different window.  You can compare it as you read the following analysis.

"I don't see inflation!"
It is there; you are riding inflation, remember?  Every strategy is ratiod against inflation, putting it exactly at the 0% line.  There are actually three inflation curves involved.  Each strategy is ratiod against its appropriate inflation curve.  Depending on how much money was invested for each year, the inflation curve is different.  For example, $30,000 invested up front would be inflated 3% of the whole amount each year.  All of it will increase in a compounded manner from the second year on.  But if $3,000 were invested each year for 10 years, the total effect of inflation will be less.  E.g., the $3,000 invested in year 8 does not have many years of inflation history and compounding behind it.


Dead Man's Wave!

Since the primary purpose of insurance is to provide for one's dependents, the effect of inflation upon Death Benefit should not be ignored.  One of the advantages of whole life compared to some other types of permanent insurance is that it can be structured, at no extra cost, to automatically raise the Death Benefit.  To do so, one keeps the dividends within the policy.  Over time, they purchase more paid-up additional insurance (PUA), increasing the Death Benefit.

Death Benefit Relative to Inflation, 42-99
Inflation Wave Ratio (IWR DB)

Here is the formula for Inflation Wave Ratio, Death Benefit:

currentDeathBenefit - inflatedBaseDeathBenefit
-----------------------------------------------
inflatedBaseDeathBenefit

By themselves, dividends and the PUA they purchase are not enough to keep the Death Benefit current with inflation.  I am purchasing extra PUA under the terms of my OPP rider.  Along with the dividend PUA, I have been purchasing roughly enough extra insurance so that the Death Benefit keeps up with inflation. As in the Cash Value curve, there are a few years in the center where I brought the inflation rate up to 6%; most future years use 3%, and past years use actual inflation numbers.

To follow along with my line-by-line description of the curve, click the one above. As usual, a smaller version will appear that will stay on top as you read the description below.


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Accesses since 3 June 2001
last modified 22 November 2010
2001 - 2010 by Rich Franzen
New model incorporated August 2002.

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No content within The Visible Policy has been approved, authorized, or verified by New York Life or any of its representatives.  I have attempted to fairly and accurately portray the policy, but there are likely to be mistakes.  Over time, I shall endeavor to correct any misinformation found herein.
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