How does Fed Rate cut affect IULs/WL?

[scagnt83]

Again, for those that missed it the first time....

Fed Rates (which dictate all interest rates in the US), have a direct impact on IUL Caps / Spreads/ PRs / etc.

The Guarantees within an IUL policy are funded using Bonds. Meaning the minimum floor, minimum Caps, etc.

If rates go lower, it takes more capital (premium dollars) to fund those guarantees. That means less capital available to allocate towards Index Options... which translates to a lower Index Return... which means lower Caps.

So lower interest rates directly results in lower Caps, Participation Rates, Spreads, etc.

But it also affects the insurers General Account. Which can cause increased expenses.

 

[scagnt83]

Do insurance carriers invest their surplus or base their pricing assumptions on fed funds rate? I had always assumed that had more to do with banking & insurance carriers tended to be impacted more by 10 yr etc Treasury rates

The 10y treasury along with all US Treasuries are dictated by a combination of the Fed Funds Rate and market buying/selling. But the Fed Rate affects all bonds to some extent, both UST and Corporate Bonds. Everything trickles up from the Fed Rate.

 

[DaKine]

The federal funds rate is the interest rate target at which banks borrow and lend excess reserves from one another on an overnight basis.

A committee of the Federal Reserve sets a target federal funds rate eight times a year, based on prevailing economic conditions.

The federal funds rate can influence short-term rates on consumer loans and credit cards.
Investors also pay attention to the federal funds rate because a rise or fall in rates can sway the stock market.

 

[Allen Trent]

I think we are seeing how treasury rates, etc are impacting IUL. if you have gotten notices like me, in addition to the initial drop of 1% on caps in March, am now seeing another 2% on some caps. Just wonder how the illustrated average will look at 3% lower cap. Will it now be illustrating at 5-5.5%? A lot of internal moving parts & costs to overcome if caps get much lower.

 

[pfg1]

I think we are seeing how treasury rates, etc are impacting IUL. if you have gotten notices like me, in addition to the initial drop of 1% on caps in March, am now seeing another 2% on some caps. Just wonder how the illustrated average will look at 3% lower cap. Will it now be illustrating at 5-5.5%? A lot of internal moving parts & costs to overcome if caps get much lower.

That would be putting it alot closer to WL. When IUL caps were 12-14% it was an easier sell to say well WL will only give you 4-5. and many folks got 12-14% alot, but I fear those days are gone

 

[Allen Trent]

That would be putting it alot closer to WL. When IUL caps were 12-14% it was an easier sell to say well WL will only give you 4-5. and many folks got 12-14% alot, but I fear those days are gone

exactly my thought. the midpoint already looked worse than many WL. So, unless Dividends rates drop soon (pretty good chance), IUL might be looking at projected 5% without all the multiplier shenanigans

 

[Lloyds of Lubbock]

I think in the whole lifemarket you are likely to see a repricing of products.
I think companies will go to a 3 percent guarantee to increase premiums.
PUA limits are already coming down.
NY life has raised its sales load to 12% on newly issued policies.
Guardian has lowered its' cap on their indexed rider.
Companies will be looking at their limited pay portfolios.
November will be a very interesting month.

 

[marindependent]

I suggest you read this site from Gen Re:
The Impact of the Low Interest Rate Environment on Life Insurance Companies:

 

[scagnt83]

I think in the whole lifemarket you are likely to see a repricing of products.

PUA limits are already coming down.
NY life has raised its sales load to 12% on newly issued policies.
Guardian has lowered its' cap on their indexed rider.
Companies will be looking at their limited pay portfolios.
November will be a very interesting month.

This x100

Multiple carriers have ceased issuing past age 70 (LFG, Penn, Pru, MoO)

Penn has capped incoming 1035s to $250k. Eliminated table shave & lifestyle credits. And no longer issues past T4. They also lowered Caps, and rates on their PDA & DCA accounts.

 

[scagnt83]

I think companies will go to a 3 percent guarantee to increase premiums.

Im no actuary. But I dont see how that would be possible in the current rate environment. I expect to see guaranteed rates to drop, because they are based on the current interest rate environment (which has dropped like a rock).