How Interest Rate Changes Can Affect the Second-to-Die “Survivorship Life” Insurance Policy

Are illustrated yield values based on the company’s “portfolio rate” or a “new money” rate? Policy illustrations with new money rates will tend to look more favorable than those using portfolio rates when market rates are currently high. Similarly, policies using portfolio rates may look more favorable than those using new money rates when market rates are currently down.

Is the Level of Projected Yields or Interest Rates Reasonable?

If one company’s illustration uses higher yields than another, are they justified based on the portfolio compositions of the insurers? If not, one should base comparison on similar yield assumptions. If differences in the insurers’ portfolios warrant a higher yield assumption, are the investments of the higher yielding company riskier and is the additional risk justified?

What is the Sensitivity of the Plan to Changes in Yields or Interest Rates?

Typically, plans that employ a greater proportion of term insurance are more sensitive to changes in the interest rate. Survivorship plans that combine participating whole life and term insurance often use dividends to buy paid-up additions to reduce the term component over time. If interest rates fall below the yield assumed with projected dividends, the actual dividend payments will be insufficient to reduce the term component as projected. Because term rates escalate rapidly as age increases, the term cost can explode.

The interest rate sensitivity also is significant if the insurance is designed as a vanishing premium plan. Under a vanishing premium plan, the policyowner is not required to pay premiums after a specified period if interest credits accrue as assumed and cash values reach the equivalent of the paid-up level. However, if interest rates do not maintain the assumed level, the vanishing point will lengthen, perhaps substantially. With some products, a 2 percent decrease in a dividend interest rate may double the number of years needed for premiums to vanish. The premium paying period will tend to lengthen more for a given deficiency in the interest rate for plans that are more heavily weighted with term insurance. Even if the premium vanishes at one point, it may reappear later at a substantially higher rate than the original premium. In some cases, policyowners may face the unpleasant choice of paying substantially increased premiums or reducing the face amount of coverage.

To determine the sensitivity of the plan to changes in interest rates and to avoid unpleasant surprises, one should ask the company or agent to prepare illustrations showing how the plan plays out with the initial premium based on current rates but with future projections based on lower assumed dividend rates or cash value credit rates.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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