Indexed life insurance gets sexy

By Sheryl J. Moore

Moore Market Intelligence


The latest trend in the indexed life market is a new type of crediting strategy, commonly referred to as a “multiple index” crediting method, and it is turning heads.

Now there are three words you don’t see in the same sentence every day: “life insurance” and “sexy.” Yet, there they are nonetheless — and for good reason. The latest trend in the indexed life market is a new type of crediting strategy, commonly referred to as a “multiple index” crediting method, and it is turning heads.

Although theoretically the multiple index crediting method can be used on any type of crediting strategy, it is available to date only on monthly averaging, annual point-to-point and term-end-point strategies. Perhaps these simpler strategies add to the appeal of this method, as the next step in calculating the potential indexed interest gets a little more involved.

The multiple index crediting method is a simple enough concept — offer a choice of two or more indexes on a single crediting method during a term. (Terms currently range from 1 to 5 years. This is when the potential indexed gains will be credited.) The multiple index method can then take one of two approaches:
  • Weighting method — Apply a stated percentage weighting to each index offered on the crediting method over the term. Potential indexed gains will be credited based on those weightings at the end of the period, based on the performance of each index.

    For example, an insurance carrier offers indexes A, B and C on a monthly averaging multiple index crediting method. Index A will receive a weighting over a three-year period of 40 percent; Index B will receive a weighting of 35 percent; Index C will receive a weighting of 25 percent. The carrier then applies a participation rate or cap to any potential indexed gains at the end of the term.

  • Rainbow method — Perform a lookback over the period, crediting a specified percentage based on the performance of the better-performing indexes. For example, an insurance carrier offers indexes A, B and C on an annual point-to-point multiple index crediting method. The best performing index over the one-year period gets 75 percent weighting in the crediting calculation; the next-best performing index gets 25 percent weighting; and the least-best performing index gets zero credit. The carrier then applies a participation rate or cap to any potential indexed gains at the end of the term.
Many agents are drawn to the appeal of a “we’ll give you the best performing index” approach. In the heightened regulatory environment, many producers are confused over which crediting method to suggest to clients.

Which will perform the best? If he/she advises their client inaccurately, they are concerned about consequences. However, with a rainbow method, these fears are subsided.
Another reason agents are drawn to both types of multiple index crediting methods is because of the indexes that are being offered on the chassis. Never before has the indexed life market seen so many exotic indexes.

The Dow Jones Euro Stoxx 50, Hang Seng, MSCI EM and MSCI EAFE all bring an international flavor to the market. Plus, the Dow Jones UBS Commodity Index was recently introduced on a multiple index method, the first time that a commodities index has been offered on an indexed UL.

Which index will be next? It’s hard to say. However, the appeal of the indexed life insurance product has never been stronger.

Naysayers who have argued about lack of diversification in the product line may now have difficulty finding an argument not to sell these fixed products. Producers who have longed for a benchmark other than the standard domestic indexes now have a choice of 17 different carriers with which to place their business. Put it all together and it translates to a striking argument for IUL, an innovative trend in the indexed life insurance market and a new way to make indexed crediting sound sexy.

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