Indexed life insurance gets sexy
October 25, 2011 by Sheryl J. Moore
Added: October 24, 2011
The
latest trend in the indexed life market is a new type of crediting strategy,
commonly referred to as a “multiple index” crediting method, and it is turning
heads.
Now there are three words you don’t see in the same sentence every day: “life
insurance” and “sexy.” Yet, there they are nonetheless — and for good reason.
The latest trend in the indexed life market is a new type of
crediting strategy, commonly referred to as a “multiple index” crediting
method, and it is turning heads.
Although theoretically the multiple index crediting method can be used on any
type of crediting strategy, it is available to date only on monthly averaging,
annual point-to-point and term-end-point strategies. Perhaps these simpler
strategies add to the appeal of this method, as the next step in calculating
the potential indexed interest gets a little more involved.
The multiple index crediting method is a simple enough concept — offer a choice
of two or more indexes on a single crediting method during a term. (Terms
currently range from 1 to 5 years. This is when the potential indexed gains
will be credited.) The multiple index method can then take one of two
approaches:
- Weighting method —
Apply a stated percentage weighting to each index offered on the crediting
method over the term. Potential indexed gains will be credited based on those
weightings at the end of the period, based on the performance of each index.For example, an insurance carrier offers indexes A, B and C on a monthly
averaging multiple index crediting method. Index A will receive a weighting
over a three-year period of 40 percent; Index B will receive a weighting of 35
percent; Index C will receive a weighting of 25 percent. The carrier then
applies a participation rate or cap to any potential indexed gains at the end
of the term.
- Rainbow method — Perform
a lookback over the period, crediting a specified percentage based on the
performance of the better-performing indexes. For example, an insurance carrier
offers indexes A, B and C on an annual point-to-point multiple index crediting method. The best performing index over the one-year period gets 75 percent weighting in the crediting calculation; the next-best performing index gets 25 percent weighting; and the least-best performing index gets zero credit. The carrier then applies a participation rate or cap to any potential indexed gains at the end of the
term.
Many agents are drawn to the appeal of a “we’ll give you the
best performing index” approach. In the heightened regulatory environment,
many producers are confused over which crediting method to suggest to clients.
Which will perform the best? If he/she advises their client inaccurately, they
are concerned about consequences. However, with a rainbow method, these fears
are subsided.
Another reason agents are drawn to both types of
multiple index crediting methods is because of the indexes that are being
offered on the chassis. Never before has the indexed life market seen so many
exotic indexes.
The Dow Jones Euro Stoxx 50, Hang Seng,
MSCI EM and MSCI
EAFE all bring an international flavor to the market. Plus, the Dow
Jones UBS Commodity Index was recently introduced on a multiple
index method, the first time that a commodities index has been offered on an
indexed UL.
Which index will be next? It’s hard to say. However, the appeal of the indexed life insurance
product has never been stronger.
Naysayers who have argued about lack of diversification in
the product line may now have difficulty finding an argument not to sell these
fixed products. Producers who have longed for a benchmark other than the
standard domestic indexes now have a choice of 17 different carriers with which
to place their business. Put it all together and it translates to a striking
argument for IUL, an innovative trend in the
indexed life insurance market and a new way to make indexed crediting sound
sexy.
