The Treasury Index UL
By Jeff Reed
Kestler Financial Group
At the end of the day, this creates a product that is somewhere between an NLG and a current assumption product, and at a price that is extremely attractive in today's market.
Necessity is the mother of invention. At least that is how the saying goes; and in the case of a recently released product from Lincoln Financial Group, I think it holds true. The product in question? The Treasury Index UL launched on February 25th. Before we get into the specifics of the product, a summary of the market conditions that led to this product launch is probably a worthwhile investment of our time.
What factors landed us here? AG 38, for one. The regulatory environment for the dominant product of the last decade is tougher than ever. The economy, particularly the interest rate environment, has also had a big impact, and both of these factors are not only in play here, but have been well chronicled in various publications. The real problem is that carriers are forced by regulations like AG 38 to reserve as if the current economy will last the entire life of a UL policy. While most reasonable people would agree that this is not only unlikely, but virtually impossible, it is the environment that carriers are currently operating in, and it has forced them to go back to the lab and come up with new products.
Now that the stage is set, how, exactly, does this product work? Quite simply, Lincoln decided to take a very predictable index, the U.S. Treasury rate, and use it as the basis for this new product. While they were at it, they decided to fix every other product variable including the cap rate and participation rate. That's right, unlike all the other indexed products out there, this one is limited to one moving part: the performance of the actual index. Of course, that is a bit of an over-simplification, as we all know that indexed products are not actually invested in the underlying index, but why let a little fact like that get in the way of a very good product story?
The result of all of this is quite simple: the clients can manage their funding based on their opinion of future Treasury rates. As these tend to move slowly and within a relatively narrow band, the variance in premium created by movement in the index is also quite narrow. At the end of the day, this creates a product that is somewhere between an NLG and a current assumption product, and at a price that is extremely attractive in today's market. The ownership experience will likely be quite a bit more comfortable, as the one variable is not in the control of the insurance company (let's face it, sometimes when the carrier is in control, it ends badly for the policy owner) and the client does not need to stress about the timing of premium payments like they do with an NLG product.
Given all of this, the one question that needs to be answered is that of performance. Just how does this product stack up against the currently available products in the market? Early indications show savings of 5 percent or more depending on age, face amount and underwriting class. Of course, what really matters is how it prices for your case.