VitalityLife Interest Rate Optimiser
VitalityLife has launched two new whole of life options, both of which offer much lower initial regular premiums. Interest Rate Optimiser is effectively an increasing premium whole of life plan, with the customer benefiting if long term interest rates rise.
Many actuaries are concerned that low sustained long term interest rates mean they have to be cautious in building up policies’ reserve values faster on their life insurance policies and that means having to charge higher premiums. If the interest rate risk could be taken on instead by the customer, that would open up the possibility of lower premium rates, especially if instead of level premiums the monthly premiums increases each year.
That’s the thinking behind this new option and it translates to upfront discounts of between 45% (age 17-45 at outset) and 20% (age 70-75 at outset) compared to normal whole of life rates. Vitality tracks 20 year spot rates and publishes them at http://www.vitalitylife.co.uk/boe and, if they are 2% or less, premiums will rise by 2.75% a year. If rates rise, the annual increase will be smaller – 2% a year if rates are 4% and 1% a year if rates are 6% or higher.
Recognising that not every customer will be comfortable (or even understand?) the risks, customers can instead choose the Premium Optimiser version of the plan and have a fixed premium increase of 2.5% a year instead.
Someone aged 44 year old choosing £100,000 of whole of life cover would pay £49.50 a month initially compared to a usual level premium of £90 a month. In its worked examples, VitalityLife says that 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.
If the customer also engages in the Vitality Optimiser option, they could receive an even bigger upfront premium discount of up to 67% (depending on their age) too.
As well as launching these two new whole of life options, Vitality has also improved other products in its range and launched a new version of its Online Adviser Hub.
Comment: The idea of using future investment returns to influence premiums and sharing the risk with the customer is not new, but VitalityLife’s option looks to work rather better and to be fairer than some of the 1980s much more complex product designs did.
The concept will still be alien to a lot of advisers, let alone the vast majority of potential customers, but that doesn’t make it a bad idea. On the contrary, what will make it attractive is the very significant initial discounts possible. The downside is that the customer has to understand the nature of the risk they are in effect personally underwriting, but if that’s a step too far, the alternative is to accept a guaranteed level of annual premium increase instead.
You may end up paying more over the very long run, but as you will be paying in future rather than today’s pounds, even that is not necessarily much of a downside.
For advisers, explaining the concept and the risks will be key and customers must accept that premiums WILL rise in future but hey – insurance always goes up each year (life insurance being relatively unusual in that premiums are usually level and guaranteed unlike say your car or household insurance).
A wider implication may be that more people will in future look at WL rather than term solutions. Some will not like that but my personal view is that having the flexibility to continue cover if or when that becomes necessary is a valuable insurance in itself. Overall, top marks for a clever idea!
Plus points: Lower cost WL premiums in return for taking on the interest rate risk; Premium rise lower in future if long term interest rates rise; Choice of approaches – fixed increases or take a risk that interest rates will rise; Engaging in the Vitality programme offers even greater cost and other benefits; Could help kick-start the conventional WL market.
Not so plus points: May be too complex for some customers and advisers; Customers need to fully understand the risks they are assuming; If you live long enough this may be a more expensive option; If interest rates do not rise the potential savings will be lower; Term insurance may still be more appropriate of the need is finite.
Website: http://www.vitality.co.uk.
Rating (max 10): Innovation: 9. Overall: 9. Platinum
Tags: WL; VitalityLife