Understanding Pegging & Substitution

Transcription

1 Understanding Pegging & Substitution Life Product Development & Support Pub5920 (12/13) GEAR For Producer Use Only Not for Use with the Public

2 Disclosure The information in this presentation is designed to be general in nature and for educational purposes only. The complete text, with nothing taken out of the context, is the only manner in which it should be used. It should never be used as an argument for the replacement of any life insurance policy. The Guardian Life Insurance Company of America, its subsidiaries, agents and employees do not give tax or legal advice. Dividends are not guaranteed. They are declared annually by Guardian s Board of Directors. Guardian s current dividend practices, including Substitution and Pegging, are not guaranteed. They are declared annually by Guardian s Board of Directors. These practices apply to the base policy dividend only. They do not apply to dividends on paid-up additions For Producer Use Only Not for Use with the Public 2

3 Guardian s Current Practices Pay a dividend that is higher than the formula dividend amount when certain conditions apply. Substitution In a declining dividend scale environment, Substitution improves policy performance in the early policy years. For example, for policies with a policy date in 2014, the base policy non-loaned dividend that will be paid in 2016 and 2017 will not be less than the base policy dividend amount illustrated based on 2014 scale. Applies to all policies except Single Premium Whole Life and Pension Trust Retirement Annuities. Pegging Beginning with the base policy non-loaned dividend paid on the fourth policy anniversary. Pegging allows for a smoother transition from year to year in a declining dividend scale environment. Pegging does not guarantee that the dividend will increase from year to year, but softens the decline in the dividend that would otherwise occur if only the dividend formula was used. Substitution and Pegging only applies to the base policy dividend (i.e., not dividend on additions) and only during the premium paying period. The intent of Pegging and Substitution is to smooth out decreases in the dividend that may occur when the dividend scale declines. For Producer Use Only Not for Use with the Public 3

4 Substitution Substitution applies only to the base dividend paid on the second and third policy anniversaries These are illustrated as being paid at the beginning of policy years 3 and 4. On the second and third policy anniversaries, Substitution replaces the 2014 dividend scale formula rate with the base policy dividend rate that was illustrated on the policy date if it was larger. Example 1: the 2014 base dividend paid on a policy with a policy date in 2012 will reflect the 2012 DIR of 6.65% not the 2014 DIR of 6.25%. Example 2: the 2014 base dividend paid on a policy with a policy date in 2011 will reflect the 2011 DIR of 6.85% not the 2014 DIR of 6.25%. For Producer Use Only Not for Use with the Public 4

5 Pegging begins with 4th anniversary dividend (i.e. beginning of policy year 5) For 2014 dividend, the process involves (1) the actual paid 2013 dividend; 2013 Pegging Components (2) the dividend that would have been paid in 2014 if the 2012 dividend scale had been continued; (3) the dividend to be paid in 2014 under the 2014 scale in the absence of pegging (i.e., based on formula); and (4) the largest of the formula dividends to be paid in 2014 through 2016 under the 2014 scale in the absence of pegging. For Producer Use Only Not for Use with the Public 5

6 2013 Pegging Formula Three Step Formula: Step 1 Compute the smaller of (2) and 98% of (1). We use this amount as a benchmark value. Step 2 Compare this benchmark against (3): If (3) is less than this benchmark, adjust the 2014 scale upward through pegging If (3) is equal or greater than this benchmark, no pegging and the 2014 dividend remains at (3). Step 3 If we peg, then the 2014 dividend will be the smaller of the benchmark and (4) Please Note: Pegging does not guarantee that the dividend will increase from year to year For Producer Use Only Not for Use with the Public 6

7 Policyholder Example A Life Paid Up at Age 99 (L99) contract was issued with a policy date in September The 2013 dividend interest rate (DIR) was 6.65%. The 2014 dividend interest rate is 6.25% and this example assumes that going forward the DIR is below 6.25%. What Dividend Interest Rate Would Guardian Use? Year Sept 2014 Sept 2015 Sept 2016 Sept 2017 DIR NO FIRST-YEAR DIVIDEND ON BASE CONTRACT 6.65% ON BASE CONTRACT 6.65% ON BASE CONTRACT 2017 SCALE ON BASE CONTRACT (with Pegging, if applicable) For Producer Use Only Not for Use with the Public 7

8 Pegging & Substitution Key Takeaways We pay dividends (including Pegging & Substitution) based strictly on policy date and policy anniversary. The date of the illustration does not factor into the Substitution formula No Pegging or Substitution is reflected on new business illustrations. Guardian is the only company to publicly disclose that they offer any type of Pegging or Substitution techniques. While other companies may smooth out their overall dividend scales(as Guardian does), we are the only company that also does so for individual policies. The intent of these practices is to add an extra degree of stability to policies. In a declining dividend scale environment: Pegging & Substitution improve policy performance by helping to smooth out declines in the dividend scale. Some competitors claim that Pegging & Substitution reduces the overall amount of dividends that could be paid by Guardian. FALSE: Pegging & Substitution do not impact the amount of dividends that Guardian can pay out. They enhance the dividend payout without re-allocating money from one set of policyholders to another. For Producer Use Only Not for Use with the Public 8