 Much ado about Nothing?
Two weeks ago I discussed the "Tipping Point" that we are almost certainly approaching in the UL markets. The end result of that is an environment where current assumption UL (CUL) products are more cost effective than the guaranteed UL (GUL) products. As pointed out in that Rant, the ramifications of this are significant, and it is probably time to cast the same critical eye at these products that we have done with GUL, EIUL and the rest of the products we have in our arsenal. One of the finer points that is frequently lost in the discussion of these CUL products is the difference between portfolio rate products and new money rate products. First, some basics as usual:
Portfolio Rate - These products and the underlying pool of money created by the premiums received at the insurance company are managed in total. A crediting rate is declared annually and is applied to both existing contracts and new sales alike. All cash value in a contract receives the same crediting rate regardless of when it is received.
New Money Rate - These products have a separate crediting rate for each premium received (typically pooled on an annual basis). Each corresponding bucket is then managed somewhat independently based on the underlying investment vehicles it is deployed in. The result to the client is a "blended" rate that is a combination of all the buckets that premiums have been allocated to over time.
Great. So what does it mean to the policy owner? In the long run it may not mean much. Keep in mind the underlying investments the insurance companies are using are more or less the same regardless of the crediting strategy they employ. Over time, these will converge. In extreme economic times (like these?), however, the question of one having an advantage over the other becomes a little more important. New Money Rate products may have a slight advantage for new sales in a rising/high interest rate environment. Theoretically, they are not "weighed down" by the rest of the insurance company's assets, and could conceivably have a higher rate as a result. Of course the inverse is true - they should result in a lower crediting rate in a falling/low rate environment. You probably already see this as another reason these should converge over time as the policy is in force through multiple economic cycles. What else do we need to know about these two approaches? Some trivia if you are interested:
New Money Rate products result in greater management complexity at the carrier. As much as I like our carriers, I don't think I care about this. They are clearly big boys and know what they are getting in to.
New Money Rate products can be perceived as lacking transparency. There is often an "effective rate" published for these products that blends all the buckets. I am not sure that the lack of information about the underlying buckets is really germane, but some clients could find this problematic.
If you have followed the discussion this far, you may be asking why we bother delving in to a topic that is more or less a wash from the client's perspective? Simple - we need to understand this in case there is competition touting the superiority of one method over another. Bottom line - I am convinced that this is a non-factor when it comes to making a buying decision.
What do you think? |
