Cap Rates - Why so much lower for FIA vs IUL?

[Orlact]

Can anyone confirm my thinking on why cap rates are so much lower for indexed annuities than they are for life?

Short answer is the option budget is lower for FIA than for IUL.
This is because FIA is a spread product, so if the ins co thinks they can return 4% on the FIA account, part of it will fund their spread (say 1.5% profit) and the rest (say 2.5%) will go to purchasing the options.
Whereas the IUL is a fee product. The ins co can put the entire 4% to work in this example in purchasing options because their profit comes from fees such as policy charges, mortality margins, etc. Therefore they can guarantee a higher cap rate.

Does this sound about right?

 

[Allen Trent]

Can anyone confirm my thinking on why cap rates are so much lower for indexed annuities than they are for life?

Short answer is the option budget is lower for FIA than for IUL.
This is because FIA is a spread product, so if the ins co thinks they can return 4% on the FIA account, part of it will fund their spread (say 1.5% profit) and the rest (say 2.5%) will go to purchasing the options.
Whereas the IUL is a fee product. The ins co can put the entire 4% to work in this example in purchasing options because their profit comes from fees such as policy charges, mortality margins, etc. Therefore they can guarantee a higher cap rate.

Does this sound about right?

I believe you are 100% correct. IUL has 5-6 ways to charge the customer & make money. FIA doesn't have that luxury.

 

[DHK]

WHY ARE INDEXED LIFE CAPS SO MUCH HIGHER THAN INDEXED ANNUITIES’? REPRINT #LIAM2019 - Wink

 

[mickeyma]

Thanks DHK. That article was very helpful. Appreciate all your posts which help agents to understand things better. Hope you have a great year.

 

[scagnt83]

IUL is usually a 15 year surrender period. 99% of FIAs are not. That means the insurer buys longer term bonds with higher interest rates for IUL. That combined with the internal fees allows for much higher Caps.