Cash value investment projections at policy issues are often too optimistic.
When Ronald Reagan took office in January of 1981, interest rates were sky high. The federal funds rate stood at 19.08%. The life insurance industry came up with a product to take advantage of the high interest rates on fixed investments. The product, current assumption universal life (CAUL) was a hit with consumers. One reason – projected crediting rates on sales illustrations as high as 12%, which made the policy very attractive.
The problem? The rate of return projected was never realized. Policies that were predicted to soar in value lapsed instead.
Variable universal life policies, which could include equity investments, were also sold with 12% returns. Though equity investments have outperformed fixed investment over the years, few VUL policies ever obtained the projected 12% returns leaving policyholders disillusioned.
Today the hot life insurance product is equity index universal life, which can capture a portion of an equity index’s return. It came into the market with agents showing projected returns above 8%. These returns have been limited by regulation and have settled in around 7%, but in The Wealth Advisors Guide to Life Insurance, we show you why even these returns are unlikely to be met.
If you are a policyholder, an advisor to a policyholder, or a trustee tasked with the management of a policy, your cash value rate of return assumption at policy issue should be conservative.
Overly optimistic expectations at policy issue more often than not lead to disappointed policy owners.