Dividend Crediting-Portfolio Method - Part 1

Insurance companies have complicated the lives of policy owners by changing the way they credit dividends on Dividend Crediting-Portfolio Method - Part 1 policies.

Traditionally, the companies used the portfolio method, which meant that they would determine the total investment return on the portfolio held by the company and then credit each policy owner with his or her share of the divisible surplus, the rate of return that exceeded what had been guaranteed in the contract. No attempt was made to distinguish the rate of return earned on monies invested with the company in previous years from the rate of return earned on those funds deposited recently.

This portfolio method homogenized rates of return and made them more stable over time. It favored new policy owners in periods of decreasing interest rates since they were able to invest in a portfolio that held securities with rates higher than generally would be available at the time they entered. The portfolio method was a disadvantage to new policy owners during periods of increasing rates because they picked up investments in the older, low-interest bonds.

Long-term policy owners were disadvantaged under this portfolio method during periods of decreasing interest rates because they had to share their higher returns with the new policy owners. But it assisted old policy owners during periods of in an illustration Questionnaire (IQ) in 1993 to help you and the professional salesperson understand the different assumptions used in illustrations. It asks the insurance company to provide answers to questions such as the following:

. Does what you are showing in this illustration differ from what is going on now in your company?

. Do you treat new policy owners and existing policy owners consistently?

. Is the number of deaths assumed in your illustration the same as the number your company currently is experiencing?

. Does the illustration assume that the number of people dying in the future will increase, decrease, or stay the same as your current experience?

. Do the mortality costs generated by your assumptions about the number of people dying include some expenses or margin of profit?

. Do these changes vary by product?

. What is the basis for the interest rate used in the illustration?

. Is that interest rate net or gross?

. Does the interest rate illustrated exceed what you are currently earning?

. Do the expense assumptions in the illustration reflect your actual expense experience?

. If more people keep your policies than your illustrations assume, would that result in all the policy owners getting less? (This is referred to as lapse supporting pricing. The forfeitures paid by people terminating their policies go to support the returns earned by people who keep their policies. The catch is that if too many people keep their policies, the returns for all will be less.)

. Do the illustrations include non-guaranteed bonuses after the policy has been held for a specific number of years?

These are not all the questions...