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Getting Out the Pencil in New York

I’m no actuary, but I’m pretty darn good at math for a regular person.

And yet, every time I read a NY policy with an accelerated death benefit that discounts the payment, which is fairly regularly, I have to get out a pencil and a piece of paper and think, think, think.

Here’s a very simplified version of how NY describes the interest rate that may be used to figure the discount.

The maximum interest rate cannot exceed the greater of:
(a) yield on 90-day T-Bills; and
(b) maximum adjustable policy loan interest rate based on the greater of:
     (i) Moody’s Average; and
     (ii) the policy’s guaranteed rate + 1%.

There are basically three values in the above sentence: T-Bills, Moody’s, and “R+1.” Using pencil and paper, I must convince myself, usually more than once, that if a company uses only one of the values to set the rate, then the rate is compliant.

Is this immediately clear to everyone but me? It’s completely intuitive to my colleague, Tom Hartman, but he’s an actuary, and I view actuaries as outliers.

It’s completely counterintuitive to me.

If the acceleration discount uses, let’s say, the Moody’s rate, I have to assign a low number to the Moody’s and higher rates to the T-Bills and R+1 rates, and then prove to myself that it’s compliant. Then I have to assign a high number to the Moody’s and lower numbers to the other two rates and ponder that situation. Then I do it again with the Moody’s rate in the middle. Amazingly enough, it always works.

Perhaps the issue is that regulations do not usually set maximums by giving the “greater of” methodology. I think I am accustomed to regs using “lesser of” language when capping a maximum, and, conversely, using “greater of” language for the setting of minimums.

If a regulatory maximum is the greater of three values, of course any one of the values can be used without regard to the other two, because the value selected is either the lowest, the middle value, or the highest. And since we’re allowed to use the “greater of” the values, meaning the highest value, of course we can use any one of the values because it’s either the highest value, or less than the highest value.

Do I sound convincing? I’m actually trying to convince myself. With luck, next time I come across a discounted accelerated death benefit, and I look at New York’s Regulation 143 to confirm compliance, it will all be crystal clear to me and my pencil will remain in my desk drawer.