Can it really make a difference?

Yes!

This week we take a look at Current Assumption UL (CUL) and what the impact of a rising interest rate environment could be on this type of product.  Months ago, I proclaimed that we may actually be in a period of time that allowed for policies to outperform projections going forward because of current economic conditions.  Turns out I was right!  Go figure!  Here's the deal:

We took our client, male age 55, and ran a $1mil CUL design solving for $0 cash at age 100.  Then we increased the rate 50 basis points, then another 50 basis points.  What did we find out?  Read on!

Premium Savings

If the rate increased in year 1 (unlikely, I know, but it makes the illustrations a bit easier to run) premiums can be reduced by 4.6% for a 50 basis point increase in crediting rate, 8.8% if the increase is a full one percent.

IRR on death benefit

The numbers here were improved based on the premium reduction, by roughly the same magnitude.

IRR on cash

These numbers improved as well, meaning that an increased interest rate not only reduces the premium, but increases the amount of cash that will accumulate relative to each premium dollar.  A great deal all the way around!

So, what's the point?  There are two.  First is the need to do annual reviews on this type of contract.  While we may have this wonderful period of increasing rates they will always rise and fall with economic cycles, and it is up to us to help our clients adjust their premium payments accordingly in both interest rate environments.  The second is a bit more subtle: remember how we discussed the tipping point between Guaranteed and Current Assumption products?  This is yet another driving force in that discussion.  In fact, one could make the argument that prices really only need to be even if we expect interest rates to rise for a client to be able to realize significant savings from a CUL product via the annual review process described above.  All without having to re-qualify for the insurance.  All they need is an in force ledger, and then they can scratch out the check for the new lower premium.

Just imagine the look on the client's face when they receive that news!

Have a great weekend.