INDEXED LIFE INSURANCE
What ’ s not being said ?
Part 2
Insurance companies have a habit of providing “ shiny bright objects ” to distribution in the first year . After all , how can they get agents to sell with them , as opposed to their 99 competitors ?
Sheryl Moore is President and CEO of the life and annuity market research firm of Wink , Inc . Her company provides competitive intelligence , market research , product development , consulting services and insight to select financial services companies . Contact : sjm @ intelrockstar . com .
Earlier this year , we explored what the insurance company might not tell you when writing indexed annuity business . In this article , we will look at indexed life insurance products .
Bait-and-Switch
Why would someone reduce the credited rates / caps / etc . on an inforce life insurance policy ? How about because with indexed life , the insurance company has to buy new options every year , if there is an annual reset indexing method on the policy ? There is also a direct correlation between inforce renewal rate behavior and method of delivering insurance policies . In independent agent distribution , insurance companies have a habit of providing “ shiny bright objects ” to distribution in the first year . After all- how can they get agents to sell with them , as opposed to their 99 competitors , unless they have “ competitive ” products ? These products are often subsidized with the renewal rates in years two plus on the policy .
Increasing interest rate charges When I first started in the life insurance industry , we took a feature of participating whole life , and stuck it on indexed UL : variable loans . More specifically- variable loans without direct recognition . By taking this legacy product feature , and placing it on a product that earns limited interest based on the performance of stock market indices , we wrote insurance history . We were illustrating credited rates of [ 7.40 %] on our IUL , and max loaning at a loan rate of [ 3.40 %].
While we were charging loan interest , the monies that were loaned against continued to earn indexed interest . This resulted in an illustration that appeared to show one “ making money off their life insurance ,” despite taking the maximum amount of loans out of the contract . The problem ? Loan rates had never been lower than at that time .
Moody ’ s Corporate Bond Yield Average is a benchmark for life insurance loan rates , and has historically floated around 8.00 %. So , that 3.40 % illustrated loan rate likely won ’ t be the rate in effect , once the policyholder initiates their loan regime 20 years after issue .
Increasing insurance charges
We all know premium loads , policy fees , per 1,000 charges , percent of fund charges , and cost of insurance charges can , and do , change . However , sometimes UL products have other factors in them that can change too . In fact , an infamous case involving an [ X ] factor on a life insurance company ’ s UL products brought one insurer not just to court , but into the Texas legislature . The insurer in question hadn ’ t increased their traditional UL charges to an unreasonable level , but a previously-unheard-of [ X ] factor had increased hundreds , and sometimes over one thousand percent ! None of these increases had been illustrated in the ledgers at point-of-sale .
Bottomline I just read about a nearly identical case with a second insurance company last week . The takeaway — read the contract for terminology and features that you may be unfamiliar with ; make sure you understand it . If you don ’ t — ask . And , if you still don ’ t understand it , maybe you shouldn ’ t sell it .
54 Perspectives Q4 2021