Interest Rate Optimiser is an increasing premium whole of life plan, with the customer benefiting if long term interest rates rise in future.
Low sustained long term interest rates in effect mean that life insurers need to build up higher reserve values on their life insurance policies. In turn that means higher premiums unless the insurer takes a gamble that rates will rise again – and long term insurers don’t like taking such risks. Alternatively, if the customer is prepared to in effect underwrite the risk of interest rates staying low, the insurer can offer the prospect of falling premiums if rates do rise.
Add in the concept of charging much closer to the risk premium each year rather than the (much higher) level premium (where the premium is guaranteed until death) and the customer gets the benefit of a much lower initial premium, with the prospect of premiums rising less quickly in future than they otherwise might.
How does the theory translate into practice? Vitality says its new plan offers upfront discounts of between 45% (age 17-45 at outset) to 20% (age 70-75 at outset) compared to normal rates. Then, if interest rates (Vitality tracks 20 year spot rates and publishes them at vitalitylife.co.uk/boe) are 2% or less, premiums rise by 2.75% a year. However, if rates rise, the increase will be smaller – 2% a year if 4% and just 1% a year if 6% or higher. If that’s a risk or choice too far, customers can instead choose the Premium Optimiser version of the plan and have a fixed annual premium increase of 2.5%.
VitalityLife gives the example of a 44 year old choosing £100,000 of whole of life cover and achieving an initial monthly premium of £49.50 compared to a usual premium of £90 a month. In its example, only by age 88 (Interest Rate Optimiser) or 90 (Premium Optimiser) would the customer have paid more overall than had they chosen a traditional whole of life plan.
Add in the Vitality Optimiser option and customers could receive an upfront premium discount of up to 67% (depending on their age).
In addition to launching these two whole of life options, Vitality has also improved other products in its range and launched a new version of its Online Adviser Hub.
What They Say
Chief executive Herschel Mayers said: “Traditional whole of life plans are based on fixed premiums for the life of the policy. We want to make sure our premiums more accurately reflect future long-term interest rates, rather than just locking members into today’s premiums. We also want it to be a fairer reflection of a member’s age and lifestyle habits. With these new products our customers can receive an initial discount of up to 67% depending on their age – and they can also save money over the term of their policy compared to a traditional whole of life product.”
What We Say
"If you just want a simple to understand guaranteed premium whole of life plan look away now…
"But if your clients are prepared to take a more hands on approach to their protection needs, Vitality now has a solution that continues its track record for innovation, and that has a measurable benefit to them.
"This plan offers that through a mechanism that in effect passes the long term interest rate risk from the actuary to the customer. Vitality points out that since 1990 the 20 year interest rate is close to an all-time low and at the beginning of January it was 2.65%. If that rate continued, a customer would see their whole of life premiums rise by a little over 2.5% a year. If the rate fell, the maximum rise would be 2.75%. Given that most people’s incomes rise over time, even a 2.75% a year rise could mean premiums making up a smaller proportion of their income in future. And if interest rates rise? Then the customer benefits.
"Care needs to be taken as just because interest rates look low today does not mean they will not fall further or not go up for some considerable time. Indeed, such a scenario is exercising many actuarial minds just now.
"If a client is happy to take on the interest rate risk, does this plan represent a good alternative to the more conventional long term term insurance solution? If their need for cover is or may be open ended; if they don’t mind paying more each year (and why should they – just about every other type of insurance gets more expensive every year); if they engage with the Vitality programme (which means looking after their health and getting active), and if they can understand and accept the risks this plan involves for them, then yes!
"Whole of life has too long been in the shadow of term insurance. Maybe, with innovations such as this, that could be about to change."