Full Disclosure covers universal life insurance products twice yearly and features both fixed and indexed policies. This new excerpt features values and features for indexed policies. Earlier reports featured straight illustrations, retirement income illustrations, and minimum premiums necessary to guarantee the face premium and death benefits. This report is a bit different and features caps and participation rates that affect the amount of gain the policy experiences due to gains in the underlying index. It also features the indexing methods (the mechanisms that translate those gains) that are available.
Indexed UL combines the flexibility and guarantees of traditional UL with the potential for high credited interest rates without participating directly in the stock or bond market to which the policy is indexed. You will see in the accompanying charts that there are significant differences among policies in how the gains in various indexes, or combinations of indexes, are translated to policy values. Caps and participation rates, whether current or guaranteed, limit the amount of gain relative to the gain of an index, such as the S&P 500 Index. Crediting methods also affect policy values because they dictate when the gains are applied to the policy’s value.
It may be tempting to highlight the best parts of the contract, while ignoring other elements that are less attractive. A “whole contract” policy analysis shows how the puzzle pieces of indexing option, crediting method, participation rate, and caps on gains fit together. A policy with a 100% participation rate, for example, may have a lower cap on gains than a policy with a lower participation rate but a higher cap.
The chart in this excerpt from Full Disclosure includes illustrated values on a current basis based on a male age 40 with a best nonsmoker class (representing at least 15% of the contracts issued) paying a $7,500 annual premium and a $1,000,000 policy. If our specified premium of $7,500 is too low to illustrate the policy for this age and face amount, the policies are blended with term insurance if available. The death benefit type is level; however, a column is included with a true increasing death benefit for each policy to indicate which are designed to generate maximum death benefits.
Internal rates of return (IRRs) figures included in the main chart indicate which products are designed to be more efficient in producing cash values, death benefits, or providing an all-around solution. The IRR can be applied to cash values as well as death benefits, and we have chosen to measure both at a policy duration of 30 years. Those seeking to analyze the relationship between cash values and death benefits will find the IRR measurement a useful tool. It’s easy to see, using the provided IRRs, which policies are built to generate death benefits, which is why it would be unfair to compare them under a level death benefit only. These values are meant to be a snapshot of how individual indexed UL plans are being illustrated on the street as a way to gauge their relative positions for our sample policyholder.
Also included at the end of the current illustration chart are the minimum level premium on a current basis to endow the policy (cash value equals death benefit at maturity) and minimum premium to carry it (cash value equals lowest cash values at maturity). With the advent of longer maturity ages we have assumed that these figures are to this age but will clarify this in future reports. All data is current as of January 1, 2009.