In an effort to blame market forces for a failure, an agent paints himself into a corner.
By Bill Boersma
As part of the discovery for a case, I was reviewing an email from the agent to the policy owner concerning an underperforming premium financed indexed universal life (IUL) policy.
We know that a part of the reason the IUL policy performance was lagging behind initial projections is because the cap rates on the policy have come down so much; hundreds of basis points in this situation. In fact, the index that 100% of cash value was allocated to for one of the policies had a cap rate that fell from 17% in 2014 to 6.5% last year. That’s officially the largest drop ever for a file on my desk.
The agent was explaining this reduction on the reduced general account yield of the insurance carriers due to the impact of historically low interest rates and for an extended period of time and the effect that has on lowering cap rates.
He’s absolutely right, among other reasons, and I’m not going to contradict his additional comment that nobody could’ve predicted this. But there’s a problem. Below I’ve included a graph of federal fund rates. It’s true that it would have been unlikely to predict sustained near 0% federal rates for an extended period of years. However, these policies were put in force at the tail end of the historically sustained low rate period. I don’t understand how one can make the statement that nobody could predict that unprecedented period of time while we were in that unprecedented period of time. It’s like saying no one could predict getting wet when you’ve already jumped in the lake.
For anyone who understands how life insurance companies operate and invest their money, they would know the carriers’ portfolio rates would have to keep coming down. In fact, the agent’s own primary carrier had a dividend rate that had come down hundreds of basis points, over 50%, since its peak. We also know that much of the life insurance companies’ portfolios are a series of laddered bonds, causing the portfolio rate to lag the market. This is evidenced by the fact that the afore-mentioned carrier’s own dividend rate kept going down until it bottomed out three years after the rates started increasing.
Besides that, the program was ostensibly put in force to take advantage of the spread between policy crediting and these very same historically low lending rates. Chuckles was effectively selling something based on portfolio rates, and thus cap rates, not continuing their inevitable downward slide while the very low lending rates wouldn’t likely increase meaningfully. These two things are tied at the hip. They can’t both stay static.
You can’t have your cake and eat it too. You can’t talk about being surprised by an unprecedented market when you have been in that market for years. You can’t blame that same market for affecting an insurance carrier’s portfolio rate in a way that is obvious and foreseeable. And you can’t blame one aspect of the market when another aspect of the market, that operates on the very same principal, makes the strategy look so appealing to begin with.
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