A Fall Fall for the Market

[Stephen]

Someone doesn't understand how indexed products work.

Just because a product returns 0% doesn't mean it didn't earn anything.

Huh?

Let's assume that you have a fixed indexed annuity. Instead of putting the money in the fixed account, you decide to put it into the 1-year point-to-point S&P 500 segment.

You give up the fixed interest you could've earned in order to have the possibility of a higher rate. But if the underlying segment doesn't perform, it doesn't credit negative interest.

Let's assume the interest you give up is 3%. What the insurance company does, is take that 'risk free' interest rate, and subtract it from the balance... but it's a liability on the company's books, not to the client.

100% - 3% = 97% remaining. That 3% is now a liability on the company's books... a liability that the policyholder doesn't see (unless they surrender their contract early and MVA apply).

Regardless of how the segment performs, the remaining 97% WILL earn 3%, because that's what it's guaranteed to do. Why is it guaranteed to earn 3%? Because the asset is held in the general account of the insurer.

But is it an "interest free loan"? No. Where did that 3% go? That went to purchase the underlying options for the given segment.

https://www.youtube.com/watch?v=WTGZv-GxvZU


Now, are those in fixed insurance products geared for a greater comeback than those who were at market risk? You bet!

As an example,
If you lost 30% of your value from $100,000 ($70,000 remaining), and the market returns 10%, then you'll have $77,000.

If you did NOT lose 30% of your $100,000, and the market returns 10%, but you are subject to a cap of 5%, then you'll have $105,000.

With indexing, it's not as much about the % return, as it is about the preservation of the asset along with a higher possible interest credit per year.

That's what I was going to say, but you beat me to it

 

[scagnt83]

The market hit is great short-term news for the IUL and the indexed annuity industry as there is a good possibility that there are a huge number of contracts out there that the carriers won't have to pay a penny of interest on (beyond a floor rate which is sometimes computed and paid at maturity based on if total return is less than the X percent guarantee.)

Everyone with a IUL or IA has basically given their carrier an interest free loan this year.

On the plus side, in terms of real dollars, holders of these products didn't lose a penny, which is a good thing, obviously.

In the long run, not paying out interest is bad for carriers because people won't invest in the the products in the future. Casinos, no matter how large or small have to send 'winners' out the door every now and then in order to bring in more players.

"In gambling the many must lose in order that the few may win."
-George Bernard Shaw

You do not understand how the product works.

First, most credit the floor on either a yearly basis or every 3-8 years. None of the top IUL products credit at maturity. (when I say top I mean product quality, not what is pushed by IMOs)

Second, it all depends on the contract date. IUL & IAs do not credit based on the calendar year. They credit interest based on the contract year. So everyone who had a contract anniversary as of last week likely had a nice gain.

Third, not all credit based on point to point. Monthly average crediting has been doing well so far this year. If this month sees a rebound it could easily not be that big a deal for monthly average crediting.

Fourth, if a person is paying IUL premiums on a monthly basis, then they will have either quarterly or monthly allocations. Which means that every month or every quarter (after the first year) there is a bucket of premiums having interest credited and locked in. I have clients that have already profited by the first 2 quarters and others who have profited by the first 7 months of the year. If the market rebounds at all it could just be one month or one quarters worth of premium that is at zero. Even if they pay yearly they can have this feature since some carriers offer a DCA option for annual payments.

Fifth, I have clients that have been credited 37%+ interest over the past 3 years. I know that you are comparing this to WL... the best those clients have received over the past 3 years is 20%ish... it would take 3 zero return years in a row for the WL to catch up to the IUL. IF they get a single zero year it is no big deal.