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  • 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.

    Originally Posted at ProducersWeb on October 24, 2011 by Sheryl J. Moore.

    Categories: Sheryl's Articles
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