Two things:
1. Define economic impact
2. Does it really matter? The problem is still an overall loss with NML. We don't have to get into a discussion about M&E because we'll assume that's a constant (this isn't to say that everyone is going to pay the same in term of mortality as NML, let's just assume NML is the best as this and hold constants for everything else across the board for all companies and their dividend components right now.
The point is simply this, the change in the NML dividend is not enough to cover the overall loss the policy hold takes due to the spread between the dividend interest rate and the loan rate. Mortality is insignificant in this discussion because that's not changing.
If we compare two contracts NML being one and an NDR contract being another.
Let's assume the following on the NDR contract concerning it's dividend interest rate and loan rate:
Div int rate is 6.15%
Loan rate is 5.45%
Let's go back to your example and keep in mind that the mortality component isn't going to change in either situation.
On that $1,000 policy loan I'm going to earn 74.50 for the div int. component, but I'm also going to spend $80 in interest.
In the other scenario my div interest component doesn't change pays $61.5 and I'm only paying $54.5 in interest.
The piece about mortality here is a magician's trick, it puts the focus somewhere else.
Here's what we know empirically about whole life insurance. The div int. component is typically the most subject to change. Mortality and expenses are typically pretty stable (i.e. it's rare to see these move around very much). This can also be thought us from an intuitive stand point, consider this:
Both Massmutual and Guardian have been pretty well known for propping their div interest rates with revenues from other insurance lines (i.e. it's not just a function of general account performance for them). This is really the only area where they can account for a return of revenues through the dividend though. They mortality is pretty simple, either they paid more claims than they wanted to or they didn't. And expenses are equally simple, either they spent more than they assumed they would have or they didn't.
The same is true everywhere else. This can also be seen through the div int rate when Direct Recognition is used. They increase the dividend because the loan interest rate is so much higher than the div int. rate.
What does NML need the $5.5/$1000 borrowed on a policy for?
This fuels the Primerica's of the world.
1. Define economic impact
2. Does it really matter? The problem is still an overall loss with NML. We don't have to get into a discussion about M&E because we'll assume that's a constant (this isn't to say that everyone is going to pay the same in term of mortality as NML, let's just assume NML is the best as this and hold constants for everything else across the board for all companies and their dividend components right now.
The point is simply this, the change in the NML dividend is not enough to cover the overall loss the policy hold takes due to the spread between the dividend interest rate and the loan rate. Mortality is insignificant in this discussion because that's not changing.
If we compare two contracts NML being one and an NDR contract being another.
Let's assume the following on the NDR contract concerning it's dividend interest rate and loan rate:
Div int rate is 6.15%
Loan rate is 5.45%
Let's go back to your example and keep in mind that the mortality component isn't going to change in either situation.
On that $1,000 policy loan I'm going to earn 74.50 for the div int. component, but I'm also going to spend $80 in interest.
In the other scenario my div interest component doesn't change pays $61.5 and I'm only paying $54.5 in interest.
The piece about mortality here is a magician's trick, it puts the focus somewhere else.
Here's what we know empirically about whole life insurance. The div int. component is typically the most subject to change. Mortality and expenses are typically pretty stable (i.e. it's rare to see these move around very much). This can also be thought us from an intuitive stand point, consider this:
Both Massmutual and Guardian have been pretty well known for propping their div interest rates with revenues from other insurance lines (i.e. it's not just a function of general account performance for them). This is really the only area where they can account for a return of revenues through the dividend though. They mortality is pretty simple, either they paid more claims than they wanted to or they didn't. And expenses are equally simple, either they spent more than they assumed they would have or they didn't.
The same is true everywhere else. This can also be seen through the div int rate when Direct Recognition is used. They increase the dividend because the loan interest rate is so much higher than the div int. rate.
What does NML need the $5.5/$1000 borrowed on a policy for?
This fuels the Primerica's of the world.
