A few weeks ago, I received a piece of marketing from a well-known insurance carrier.
The piece went to the insurance carrier’s agents and announced the updated cap rates and maximum illustrated rates for their indexed universal life (IUL) products. As has been the case for many years, they are all going down. This means that whatever rises the S&P 500 (or whatever index is being tracked), in good years the maximum credit rate will now be at the lower cap rate. There is no judgment here; It is the same, but it will suppress the future performance of IUL contracts and make it even more challenging for policy owners to support earlier estimates and achieve their goals.
The copy shows reductions in each of the two dozen indexes ranging from two basis points to several hundred basis points for several different policy series. (Remember, I have to be very fuzzy here.)
This does not make this insurance company any different or worse than others; They are all in the same boat. But I’m going to pick something that they do relate to their piece, although, unfortunately, it’s not unique to them. Everyone knows that almost all companies spin things, especially bad news, and this company is no different. However, when does the spinning go too far?
mixed message
In light of the negative announcement, the carrier reflected on its strong history. This includes remembering the launch of its first IUL product several years ago and what is the annual average credit rate since then. This is an impressive rate for a life insurance product, especially for a non-securities-based contract, such as an IUL policy. Of course, the gross credit rate and actual return are not the same number by any stretch, and the return on cash value over premium is likely to be hundreds of basis points lower than the advertised credit rate in most situations.
Here’s the kicker. The recalculated historical credit rate is significantly higher than the current cap rate on the product’s index account. did you get that? The cap rate (the maximum rate policy cash value can be credited) is lower than the long term credit rate they are claiming. Additionally, the product’s lifetime credit rate is a few hundred basis points higher than the maximum acceptable illustrated rate for the product today.
The piece acknowledges that the maximum delinquency rate is lower than the long-term credit rate and that past performance is not a guarantee of future performance. They then say that those long-term rates reflect the value of the products.
But are they?
misleading number
There are two primary reasons why long-term rates are as attractive as they are. First, the S&P 500 has been on a tear since the IUL policy began, averaging about 15% annually. Second, cap rates were higher than they are now, at times hundreds of basis points throughout the product’s existence. Potential policy owners are now making decisions at a time when the market is high, and the policy cap rate is approximately 50% of the long-term real S&P 500 return, which is driving crediting rates about They are telling. Moving forward is a definite impossibility.
Here’s the math using made-up numbers, nonetheless, a realistic example of what I’ve seen a few times with different carriers. Assume the long-term credit rate of a given S&P 500 Index IUL product is 8%. Then we would say that the current cap rate for the product is 7%. You can’t have 8% credit when your maximum rate is 7%! I think it’s safe to say that everyone knows it can’t work. Yes, I know they are not really saying that you will get 8% in the future. Still, if you try to tell me that they aren’t, or possibly are, indicating something more positive, I’ll reply that you’re being hypocritical. A long-term history of 8% is pointless when you can’t get more than 7% right now, so what’s the point of focusing on it?
you know what? I could sip a two handed basketball from standing under the net. but guess what? I can’t do it now. But I’m telling you I used to be more athletic before, so it must mean something for you to move on. It’s still proof that I’m great. are you buying it?
Reducing those numbers is confusing because they’re not even possible, but it’s worse than that. Based on the current cap, modeling suggests that the actual credit rate will be in the range of 4% to 5% gross, assuming that the coming 30 years track the previous 30 years with the current policy cap rate. After policy expenses and death charges, hardly anything will be left, even though the S&P 500 has given a return of 15%. That’s just what works.
This is marketing the insurance company sells to agents who in turn sell to the public. It doesn’t sit well with me.
Bill Boersma is a CLU, AEP and LIC. More information can be found here www.OC-LIC.com, www.BillBoersmaOnLifeInsurance.info, Call 616-456-1000 or email [email protected],
