The second session of our webinar series, "Grow Your Business with IUL" took place on Thursday, May 1. Chris Korfe of North American was once again kind enough to join us to discuss the topic of "how insurance companies provide index credits."
Here are links to the other parts of this webinar series:
- Part I: IUL Mechanics
- Part II: How Insurance Companies Cover Indexed Credits (you're here now)
- Part III: Compelling Features
- Part IV: Illustration Tips
- Part V: How to Sell IUL
Here are a few takeaways from Chris's presentation:
- How Can Companies Provide Interest Rates Linked to an Index with Downside Protection?
- The insurance company is not investing the client's premium dollars into an index.
- Instead, it is investing premiums in fixed-interest investments and using the earnings from those investments to purchase the call options of a particular index.
- The call options contract provides the right, without ownership, to purchase a specific amount of the index at a specified price within a specified period of time.
- If the equity index increases, the insurance company can exercise the option at a previously purchased option price and then credit the interest to the policy owner. If the equity index decreases, the company will not exercise the option and has lost the cost of the option.
- Why Do Caps and Participation Rates Change?
- The insurance company must have some limits to the upside interest credited in the policy holder's account when mark conditions become volatile or the demand for the option becomes expensive. The way this can be accomplished is through participation rates and growth caps.
- The two items looked at are the option budget and the cost of the option. If the option price lowers, the participation rates and caps increase. Similarly, if the option price is higher, there are lower caps and participation rates.
- How Can Companies Afford Variable Interest Rate Loans?
- North American uses Moody's corporate bond yield average and re-evaluates bonds on a yearly basis.
- Why are Caps and Participation Rates for Annuities and Life Insurance Different?
- Life insurance is a long-term vehicle based on long-term bonds with relatively stable pricing. Annuities are largely priced using new money rates.
- Life insurance has a bigger option budget than annuities. Life insurance works with 20-30 year illustrations versus 10 years for annuities.