Administrative considerations when using “single deposit” Insured Annuity solutions
In May 2011 Manulife introduced new pricing and cost structures to InnoVision YRT. YRT to 100 rates were substantially reduced and the YRT 85/20 rates were replaced with less expensive YRT 85/15 rates.
The new YRT 85/15 rates often provide significant benefit when linked to Insured Annuity solutions. When you use these rates under a single deposit solution, the net cash flow benefit for your client can be significantly higher than what they may have received from a more traditional pay life insurance solution.
With a single-pay solution your client makes one deposit to the insurance policy, with the remainder of the funds used to purchase the annuity. In this scenario, a portion of the deposit is placed into a side account. As investment room opens up in the policy, the funds in the side account will automatically transfer into the insurance policy. Depending on the facts of the case, the side account balance will usually disappear by the third or fourth year.
The single deposit Insured Annuity solution does create some administrative considerations.
The InnoVision illustration system assumes deposits are received at the beginning of the payment period, at the beginning of the policy year (the policy year date) for annual pay or the beginning of the policy month for monthly pay. In reality, deposits may be received at different times than what has been assumed by the product illustration.
This could result in different values showing on the product illustration than the actual policy values appearing on the anniversary statement. This variation is a result of the funds not earning interest for the same period of time as reflected in the product illustration and, if level death benefit, due to differences in the cost of insurance charged because of differences in the net amount of risk.
Here’s an example.
Mrs. Smith is 72 and a non-smoker. The least expensive InnoVision single pay amount for her using YRT 85/15 rates (VC option and a 2.5% product rate) is approximately $458,000.
The InnoVision illustration software calculates this amount by assuming the deposit is made at the beginning of the policy year, or the date the policy is issued. If the deposit is made after the policy is issued (for example one week later) this difference in timing will impact the amount of interest earned and the net amount at risk under the policy resulting in a difference between illustrated and actual values.
Is there a way to deal with the timing difference?
You can increase the client’s deposit to compensate for the deposit timing difference, but the calculation is not straightforward and the client will need to pay more money than illustrated.
A better approach may be to “future date” the policy. On a case by case basis, Manulife will send out the policy dated up to 10 days in the future so the deposit coincides with that date. This provides an opportunity for you and your client to meet and secure the single deposit amount prior to the actual policy year date. As long as the deposit is made by the future policy year date requested, Manulife will apply the deposit on that policy year date which will allow the policy to start as illustrated.
If you are interested in future dating a policy, talk to your case coordinator in advance of policy issue.