There was a significant announcement from one of our carriers this month. In one of many decisions at the carrier level based on current economic environment, Lincoln Financial Group announced that they are reducing all current interest rates to guaranteed minimums effective January 1, 2012
. You can read about it here
. So what are we to make of this? Well, it is a pretty clear indicator of how challenging manufacturing any fixed product is in this environment, but that certainly isn’t news to any of us at this point. The impact on sales at Lincoln and the impact on policy holders are probably more significant topics. Let’s tackle the Lincoln focused questions first.
sounds rather severe, and if only given a cursory read, may lead a producer or client to look to another carrier. As with most things we talk about here, I suggest we pause for a minute and think about that reaction, and if it is the right one? Why is Lincoln doing this? Simple, they need to stay profitable, and paying out more than they are earning is not exactly a winning strategy. I think this may be the equivalent of tearing the Band-Aid off in one clean jerk rather than easing it off and extending the pain. There is something to be said for the strategy, as it does allow for clear expectations out of these products. Specifically, the only way to go is up!
Of course, there is still another element to the product – mortality and expense charges – that can affect pricing. However, let’s take a look at when and if a carrier starts to raise M&E charges. Usually only as a last resort of a failing carrier, which Lincoln is far, far from being. So if we do not expect Lincoln to start increasing M&E charges, I think it is time to start looking at our second question – what about the client? How are they impacted?
There are two UL contracts that are impacted by this, and one of them just happens to be the product of choice for one of my current cases. The product is the Life Guarantee Plus, and it is a Guaranteed Universal Life contract with modest cash accumulation. I use it with younger insureds who may actually want to be able to take advantage of future 1035 exchange opportunities and the like. So how did this impact pricing? Not at all! Guaranteed product means the premiums are not interest rate dependent. Sure, there are now lower projected cash values, but only about 10%, or an 80 basis point reduction in IRR at year 20.
The second product is the Life Current UL, and it’s tough to say exactly what the impact will be on this without being able to run the old rates (never should have updated that software), so let’s just pull another random carrier and see what a 100 basis point drop in crediting rate does to their contract. Solving for $1000 at age 100 (Male age 55, Standard Nonsmoker, $1mil face), we see an increased premium of 10.4%. What if we don’t want to increase premiums? Rather than having projected death benefit through age 100, the policy now lasts through age 89. Given that this is still past mortality, I think a prudent course may be watchful waiting with this type of policy. As interest rates increase in the future Lincoln will either have to increase their crediting rates to compete, or face the possibility of adverse selection as the healthy clients jump ship to take advantage of more favorable conditions at other carriers.
In addition to these two products, this rate reduction will, of course, impact other products in the Lincoln portfolio to a lesser degree. I encourage you to read the announcement for the details. At the end of the day, all this means is Lincoln will be missing out on sales they would rather not have. Our clients who own Lincoln products will be well served by taking a wait and see approach, rather than over reacting to what may prove to be a small bump in the long road of permanent life insurance ownership.