The Critical Illness Company

A company should disclose whether the interest rates credited are:

• gross (before any expenses being subtracted), or
• net of investment expenses, or
• net of investment, expense, other company expenses and profit loads.

Participating products’ dividend interest rates are most often net of investment expenses, but prior to other company expenses and profit loads being deducted. Universal life products’ declared interest rates, on the other hand, are net of investment expenses, other company expenses and profit loads. Thus, two companies, both basing their interest rates on equal 9 percent total investment income returns, both having .5 percent investment expenses and 1.25 percent for other expenses and profit loads, might declare interest rates as follows:

The mutual company would declare an 8.5 percent dividend interest rate.

The universal life product would declare a 7.25 percent net interest rate.

Neither company might say any more regarding how their rates were declared. More importantly, both products will perform identically assuming that both have equal mortality and other charges. Yet the consumer and producer will look more favorably, although incorrectly, on the mutual company with its 8.5 percent dividend rate. Adequate disclosure by the companies will help remedy this misperception. Most participating policies will pay a “terminal dividend” at the termination of the contract. The longer the life insurance policy has been kept in premium paying status, the larger the terminal dividends.

Interest rates based on assumptions in an illustration:

1. Interest earned by the company on:

1 a) all investments now held

  b) New investments,

  c) New investments over a certain number of past years,

  d) Other combinations of actual investments

2.  An independent index such as:

a) Treasury Bills,

b) Moody’s long-term bond index,

c) Other indices.

3.  Another basis not tied to company results or an index,

4. Interest rates may be the gross interest rate resulting from investments, indices, or other measures, or the gross interest rate reduced by:

a) Investment expenses

b) Investment expenses and other expenses

c) Expenses and profit

d) A fixed amount or percentage.