jtow11
Expert
- 81
I like what I hear about it, but have not been able to see an illustration. Looking for feedback.
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Good evening everyone!
A post about indexed insurance products has been brought to my attention. I want to provide a little more information about what I refer to as “hybrid indices” on indexed annuities and indexed life.
First of all, we need to remember that 220% of 2.00% is only 4.40%. Meaning- just because the participation rate is high, doesn’t mean the product will necessarily perform.
The case that was brought to my attention features an index that was just created on 4/8/22. The index was then added to the IUL product offering on 4/30/22.
It is VERY important to understand how such an index’s historical performance is calculated. In this particular example, there truly is no historical performance because the index didn’t exist even one month before the product launched. Disclosures on indices such as this are akin to, “this index has no history, but here are some numbers we put together, assuming it does have history.”
Some hybrid indices will use the performance of the indexes CONSTITUENTS, in lieu of actual historical performance. Again- disingenuous because standalone constituents are not identical to the constructed index.
And- current options costs are almost always assumed in the backcasting of these indexes, which is disingenuous because options costs in the past are not like they are today.
In the aforementioned case, the index has an annual 0.50% index fee. This fee has the effect of drag on the index.
Also of interest is the fact that although the indexing method has a current participation rate of 220%, it could go as low as 65%, once the contract is inforce. The insurance company has to go out and buy new options every year, so the inforce participation rates WILL change. Note that many insurance companies reduce their inforce rates, even if new options costs don’t warrant it. This is a function of independent agent distribution. The insurance company wants to give you “shiny, bright objects” to sell their product; so, they boost the rates in year one, snd then adjust them downward in years 2+.
We also need to take note of the fact that the previously mentioned indexing method has an annual 1.00% annual fee, which is deducted from the IUL’s account value. This will have the effect of drag on the IUL’s performance. And it will be deducted every year, even though the policy could earn 0.00%. Plus, this fee could increase to as much as 1.50% annually, once the case hits it’s first policy anniversary.
I have been doing this for 24 years. I am an independent expert with a history in inforce policy management, illustrations, product development, research, and expert witness work. Insurance companies WILL increase charges on inforce insurance contracts. They will also reduce participation rates/caps [increase spreads] on inforce insurance contracts. And sadly, they will distribute Illustrations that are too good to be true. What they make on the sales of these products is far beyond what they would have to pay to settle a class action lawsuit.
You have to do the research for yourself. The insurance company has a vested interest in you selling their product. Your marketing organization does too. Be careful out there.
I like what I hear about it, but have not been able to see an illustration. Looking for feedback.
That is interesting, thank you. I was drawn to Nationwide as they have a built in LTC rider at no additional cost along with the other benefits.