Are You Ready for 3.5% Life Valuation Rates?
2011-Nov-01 - Christopher H. Hause
They may be coming for 2013! As many of you know, the Standard Valuation Law sets flexible interest rates for life insurance and annuities. In addition, many forms of individual health insurance use the "whole life" rate (Duration Greater than 20 Years) as the maximum valuation rate for active life reserves.
The formula for the "whole life" in a relatively low interest rate environment boils down to this: I = .03 + .35 (R - .03). R in this environment is the 12-month average reference rate. Rearranging the formula and recognizing that the interest rate is rounded to the nearer .25%, but cannot change by less than .50%, we solve for the reference rate that will generate a 3.625% un-rounded rate.
The answer (my friend) is R= 4.78%.
Right now, we are projecting the 12-month average reference rate to be perilously close to the break point that will trigger a decrease in the "whole life" rate from 4.00% to 3.50%.
Many carriers have already reduced their guaranteed interest rates on flexible premium life products in recognition of the lower interest rate environment. With the increased likelihood of lowered valuation interest rates, we recommend any remaining 4% guarantees be reduced now.
If you have any questions, or if we can help in any way, let us know.