How does Fed Rate cut affect IULs/WL?

[Tahoe Ray]

I thought IUL allocations allowed a portion of the premium to follow the growth of the s&p 500. What would a low interest rate environment have to do with that, and what do bonds have to do with IUL's?

Your money never is actually invested in the market (unlike Variable UL). The carrier puts your money into its general account.

So, if you put $100 into an IUL, the carrier will take 95 dollars will buy bonds, $1 will go to commissions, admin, etc. and the other $4 buys options to give you notional exposure to whatever index you're tracking.

If interest rates go down, the carrier now needs to put $97 into bonds, $1 to the house, and now they only have $2 to buy options. That means lower caps, pars, and higher spreads.

Lastly, options are primarily priced using two functions, volatility and interest rates. So not only does the carrier have to deal with the problem outlined above, but low interest rates and high volatility makes options more expensive. This further magnifies the problem.

Hope that helps.

 

[Tahoe Ray]

So to clarify a majority of the premium ($95 of $100) goes into the insurance companies general account to buy bonds so they can make a fixed income. Now because low interest rate environments cause bonds to issue at a premium, that is why the insurance company has to put $97 dollars rather than $95. Am I understanding this correctly and is it safe to conclude high interest rate environments are better for IUL's?

P.S. Your reply was incredibly insightful! Thank you!

No problem.

It all goes to the general account and that was a very simplistic example that I used but yes, in general, your recap is accurate.

Higher interest rates are good for insurance companies in general.

 

[Allen Trent]

So to clarify a majority of the premium ($95 of $100) goes into the insurance companies general account to buy bonds so they can make a fixed income. Now because low interest rate environments cause bonds to issue at a premium, that is why the insurance company has to put $97 dollars rather than $95. Am I understanding this correctly and is it safe to conclude high interest rate environments are better for IUL's?

P.S. Your reply was incredibly insightful! Thank you!

Correct. However, it isn't just the premium it is all the cash values of all the IUL. So, a policy with 100k CV that has a guarantee of 0%fot the year needs to make it back to 100k in 13 months. So, if the carriers general fund invested in bonds & treasuries is making 5%, they need to put 95k into their general funds investment to get back to 100k next year like Tahoe said. Just wanted to clarify it is all CV not just premiums being paid.

 

[DaKine]

Can someone explain to me how the 0% Fed Rate, or possible negative interest rates in the future, will affect max funded WL and IUL policies?

It doesn't that's just the fed funds rate. The growing amount of debt of the United states and Globally will create downward pressure on future interest rates. Until debt is lower and productivity is higher the trend will be down.

 

[DaKine]

I personally use the IUL as a storage tank to protect and grow my money. Grow it when times are good, and protect it when times are bad. One of the many benefits of having cash value in the IUL is access to capital. In today's environment when access to capital is critical, I am leveraging the cash value into under valued blue chip stocks to capitalize on the stock markets down turn. The loan rate on a line of credit to collateralize the cash value in a well funded IUL is less than 2% from my local bank. I can access 90% of the cash value through the line of credit for 2% and position the borrowed funds into a well designed equity portfolio to take advantage of the correction going on in the market. All while my cash value is still compounding and safe in the policy. I expect to make a nice profit on this market correction by having access to capital when others don't. This is how I've used my cash value in the IUL's over the last 20 years. I killed it in the housing bust, having access to capital when the banks were giving away foreclosed properties for pennies on the dollar was a huge opportunity. What is occur now is a big of an opportunity for those that have access to capital. The IUL is just a garage to park that sports car. It's not the sport car!

If your doing this you should probably just get a VUL if you want time the market.

 

[Allen Trent]

If your doing this you should probably just get a VUL if you want time the market.

Probably not going to happen. He is an author of a book about IUL and all that it can do. For the most part a good book. Mission One Million: Creating Wealth One Family at a Time Steve Burton - Google Search:

 

[Tahoe Ray]

It doesn't that's just the fed funds rate. The growing amount of debt of the United states and Globally will create downward pressure on future interest rates. Until debt is lower and productivity is higher the trend will be down.

I get what you're saying about fed funds but the 10yr note is like 60-70bps which DEFINITELY affects these products.

 

[DaKine]

I just think the debt affects things more.

 

[Tahoe Ray]

I just think the debt affects things more.

Debt incentivizes lower rates but the result is nonetheless the same.

Low interest rates + high volatility = BAD for carriers.

 

[DaKine]

Debt incentivizes lower rates but the result is nonetheless the same.

Low interest rates + high volatility = BAD for carriers.

Bad for economies also. The goverment used to be able increase GDP by 2 to 1 by taking on debt and as we take on more debt we get 1.3 to 1, 1 to 1, 0.5 to 1 until it is not worth it.