Expect Enhanced Rate DCA Accounts To Spread To Other Products
For policyholders who may need a little extra help to make the move into a variable life or annuity contract, insurers have offered a unique spin on dollar cost averaging.
For the past few years, they have offered so-called enhanced rate DCA accounts. These feature very attractive interest crediting rates for funds inside the DCA accounts, but require the funds to channel out into other variable subaccounts within a short period of time, usually within six to 12 months. The design helps address concerns about investors inability to time the market.
When they were first introduced, it looked as if they might be a temporary feature, offered for use during unique market conditions. But as you will see, it now seems enhanced rate DCA accounts have gained a more permanent footing.
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The interest crediting rates offered by these accounts are typically well above “market.” Thats why the rate can only be maintained for short periods of time.
For example, it would not be uncommon to see six-month DCA rates at levels 600 basis points (6%) above Treasurys, and 12-month DCA rates at 400 basis points (4%) above Treasurys.
Theoretically, these enhanced rate DCA accounts can be used for both variable annuity and variable life contracts. However, in practice, they are commonly found in VAs, but less common in VLs.
For some insurers, these enhanced rate DCA accounts are offered as a periodic “special,” to energize sales for select periods of time. Often, these carriers find that they face pressure to maintain the enhanced rates permanently.
Some variable products are structured to allow for enhanced DCA rates on subsequent deposits into a flexible premium deferred annuity. More products, however, limit the enhanced rates to initial premium deposits or to deposits received a short time after issue.