June 20, 2013 by Pat Lanigan
We have three questions in this month’s Q&A with answers provided by Sheryl Moore, President and CEO at Moore Market Intelligence.
Pat: Let’s start with Caps, how can one company offer higher caps than another company and are they sustainable over the long haul?
Sheryl: Insurance companies are able to effectively “subsidize” their caps on IUL by making their profit through other features such as premium loads, policy fees, per thousand charges, or COIs. However, all things being equal between two different IULs, if one has substantially higher caps than the other, you do need to ask if that rate is sustainable. When the insurance companies buy the options that provide the caps/index-linked potential, it is comparable to buying a bar of soap at K-Mart versus Wal-Mart. No insurance company has some “secret source” of incredibly discounted options. Often companies that claim to have such efficiencies are merely subsidizing their first-year caps, by dropping their renewal rate caps once the policy is in force.
Pat: Assuming the viability of maintaining higher caps, will this significantly improve the policy performance over the long haul?
Sheryl: There are many things that will affect the performance of an indexed UL over a long period of time. Will the caps remain level? Will the insurance charges stay the same? How will the market perform? Generally, insurance products are priced to return 1% – 2% greater interest than fixed products. So, if traditional ULs are crediting 4.5% today, IUL issued today could earn 5.5% – 6.5% over the life of the policy. Some years, the policyholder may receive zero credited interest. Other times, they may receive double-digit gains and “cap out.” Ultimately, what is most likely to happen is somewhere in between and could average out to be 1% – 2% greater than what fixed ULs were crediting at the time of policy issue. This is regardless of crediting method, index used, or moving part used to limit the indexed interest.
Pat: How relevant are the minimum guaranteed interest rates for IUL?
Sheryl: The guaranteed minimum rates and floors on indexed life are generally not going to be very relevant. All that it takes is one solid year of gains on the contract and these minimums are a moot point.
Guarantees are backed by the claims-paying ability of the issuing company.