8I-103-01

[Anonymous]

"A loan spread for expenses and contributions to surplus between the policy loan rate and the dividend loaned interest rate credited to loans of 0.50 to 2.00% is typical."

Is this even a sentence? I guess I can parse it like this:

"A loan spread (for expenses and contributions to surplus) between (a) the policy loan rate and (b) the dividend loaned interest rate credited to loans, of 0.50 to 2.00% is typical."

But what the heck is (b)? HELP!

[Anonymous]

I interpret it as the direct recognition concept where policies with loans get lower divs. (b) is the interest rate used for these policies, presumably lower than the interest rate for policies w/o policy loans.

[Anonymous]

A permanent participating policy with loans and direct recognition -

Guaranteed Interest Rate: 4.00%
Portfolio Rate: 7.50%
Dividend Interest Rate: 7.00%
Loan Interest Charged: 6.00%
Loan Interest Credited in divs: 4.50%

Cash value = $100
Loaned value = $ 30

Interest Component of Dividend =
$70x(0.07 - 0.04) + $30x(0.045 - 0.04)=$2.25
Interest Due on Loan =
$30x0.06=$1.80
As you can see, the customer was charged 6% interest but their policy was only credited 4.5% interest in their dividend calc.
Spread on loan = 150bps

[Jack]

Anon basically has the right idea, but I don't know why he's deducting a minimum rate.

In his example the loan rate is 6% but the div int rate on the loaned portion is 4.5% which is a 150 bp spread.

[Sancho]

The policyholder is already receiving the guaranteed interest in the annual increase in reserves. In determining the dividend, only interest in excess of the guarantee is paid, otherwise the insured would be receiving the guaranteed interest twice.

[Jack]

So what Anon is calling a minimum rate is actually the tabular rate. I get it. Thanks for the help.