May 23, 2013 by Pat Lanigan
This month is a Q&A double header with answers provided by Sheryl Moore, President and CEO at Moore Market Intelligence and authority on indexed annuity products.
Pat: Does any one index crediting strategy outperform any others in the long haul? What about in volatile times like we are experiencing now?
Sheryl: No, the option seller is going to price the options (which are the instrument that provides the index-linked interest on IUL), so that his risk is relative, regardless of index, crediting method, or pricing lever used to limit the indexed interest (cap/participation rate/spread). In our pricing transaction, we take [5%] of the policyholder’s premium and use it to buy options. Today, based on interest rates, market volatility, and option costs, our option seller might tell us that our [5%] will buy an S&P 500 annual point-to-point cap of 12%. However, if the market spikes, one month from now that same 3% may afford our policyholders a cap of 17%. (After all, what is the likelihood that the index will go up 17% when it is already at a historically high level?) This is why the indices that have historically performed the best are going to have lower caps than an index that is mediocre. Sure, some crediting methods and indices will perform better than others in certain environments. However, over a long period of time, they will all perform about the same.
Pat: Over the long haul, does it really matter which IUL product I sell? (excluding riders, ect)
Sheryl: YES. When we price universal life, we price it for one of three objectives: extended no-lapse guarantee (NLG), cash accumulation, or premium-to-endow (most amount of insurance for the least amount of premium). Believe it or not, we do have IUL products that are priced for all three of these objectives; not just cash accumulation. In fact, one of the most competitive NLG products in the insurance industry is an indexed life insurance product!
Agents selling indexed life need to identify their client’s insurance needs and properly identify a product that meets the necessary product objective. From there, the agent needs to do their due diligence on the underwriting insurance company, and evaluate how they will treat their clients’ policies once the contracts are inforce. From there, the agent is positioned to compare products among their qualifying companies in terms of performance, cost, and benefits. Although it can be difficult to compare these products apples-to-apples, I suggest first comparing all of the product features independently of the indexed crediting. Then, compare caps/participation rates/spreads on like crediting methods. And above all, do NOT rely on the illustrated rate that is defaulted in the carrier’s software as an indication of which product is “best” for the client!
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