One of our carriers announced an interest rate reduction on their accumulation focused Universal Life Insurance contract in late May.  It sounds pretty steep - a 65 basis point drop - but as you have come to expect, I immediately wondered what the real impact on policy performance is?  The reduction in rate equates to a 12% drop.  Is the policy now 12% more expensive?  Inquiring minds (well, my mind) want to know!

The only way to find out is to run the numbers.  So let's run some illustrations!  Here's the deal:

• Male age 45, Preferred Nonsmoker
• $1mil Face Amount
• Solve for premium to carry to age 100 on the current side?  10.7% increase!
• Solve to endow?  12.8% increase!
• Solve to carry to age 90?  7.2% increase!

Great.  Sounds horrible, right?  Maybe, maybe not.  This increase was announced for new sales, so we can take our dollars and go talk to a different insurance company on a new sale.  The real issue is what would happen if this were an in force contract?  Even worse, what if the client was now uninsurable and could not qualify for coverage today?  What would that impact look like?

If we solve to carry to age 100 again, and then use that premium with the interest rate 65 basis points lower, what happens to the contract?  A five year reduction in the duration of the contract, as it now carries to age 95 rather than 100.  Keep in mind that this was on a 45 year old, and that interest rate changed in year one.  Fifty years of reduced rates only shortens the life of the contract by five years, and that is still beyond life expectancy (particularly if the client is now uninsurable, right?).

So how do we respond to rate reductions like this?  Well, I think we let our dollars do the talking if we are looking at new sales.  The in force contract is another story.  I think the key "take-aways" from this discussion are these:

• Reacting to any change in the market without taking a moment to investigate the real impact on your specific policy or client is not going to do anyone any good.
• Funding to life expectancy and the like (which has become increasingly popular) may be more than a bit problematic unless there is guaranteed coverage (Even then, make sure you consider the impact of living the five years beyond the anticipated end of coverage!  Expensive!).  I would consider banking that savings in case you need it for that catch up premium later on.  (Wow, that sounds almost like buy term and invest the difference, doesn't it?!)
• The time to make decisions about this issue is when the change is made!  I see contract after contract that has been ignored for too long and it is now too late to do anything other than watch the policy implode.  Completely preventable if caught early.

So is a rate reduction a major issue, or just an inconvenience?  It depends.......Unsatisfying, I know, but there it is.  It's kind of like the Mythbusters finding a myth Plausible rather than Confirmed or Busted!  Just like the Mythbusters, make sure you investigate fully before coming to a conclusion!