M's IUL Growth Cap Rate Model

Declining long-term interest rates will continue to put downward pressure on life insurer indexed growth cap rates. M has developed a proprietary model to forecast changes to a 1-year, point-to-point S&P 500 index. Through a series of “What if?” assumptions, we’ve created a range of projections for changes in growth cap rates through 2025.

March 23, 2021

If current fixed income and equity market conditions persist, we anticipate cap rates for 1-year, point-to-point S&P 500 index growth cap rate strategies to fall by 0.75% over the next year and by 2.50% over the next three years. Clients and advisors considering using fixed account products such as indexed universal life should consider the effect of declining growth cap rates on their insurance plan and whether alternatives to IUL are worth evaluating for their life insurance needs

M’S IUL GROWTH CAP RATE MODEL

M has developed a proprietary model to forecast changes to a 1yP2P S&P 500 growth cap rate. The M model uses inputs based on the variables used in the Black-Scholes-Merton options pricing model.1 Chart A shows the M model’s predicted 1yP2P growth cap rate and the historical growth cap rate of a carrier’s indexed account.

The model correctly predicted a decline of 3.70% from 2014 to 2020. During that same period, the carrier’s growth rate declined by 3.50%.2 As there are numerous carriers with IUL products, the direct correlation year over year with a given product is not as important as understanding the forecasted impact.‍

WHAT IFS? 

The model’s predictions depend on the assumed inputs. As of December 31, 2020, the model projected a growth cap rate of 8.40%, compared to a current IUL growth cap rate of 8.50%. 

Chart B displays the model’s IUL growth cap forecast for the next five years if current fixed income and equity market conditions persist. 

Using the model, we can forecast possible changes over time to 1yP2P growth cap rates by making a series of “What if?” assumptions. Based on the current levels of our model inputs, we demonstrate what would happen in each scenario. Chart C shows what these various scenarios create for expected changes in growth cap rates.


“What If?” Assumptions 

Long-term interest rates 

• Remain flat at current levels 

• Increase by 1.50% over the next five years 

Short-term interest rates 

• Remain flat at current levels 

• Increase by 1.50% over the next five years 

Stock dividend yields 

• Current 

• Increase by 0.50% 

Stock market volatility 

• High 

• Long-term average 


The average change of these hypothetical scenarios from the model growth cap rate (as of December 31, 2020) is sobering. 

• December 2021: down 0.62% 

• December 2022: down 1.44% 

• December 2023: down 2.19% 

• December 2024: down 2.60% 

• December 2025: down 2.22% 

In every scenario, growth cap rates are expected to decline for at least the next four years. 

Again, clients and advisors considering using fixed account products such as indexed universal life should measure the effect of declining growth cap rates on their insurance plan and include alternatives to IUL in evaluating their life insurance needs. 

THE BEST CASE SCENARIO 

1.10% drop in growth cap rates over the next two years and a 1.75% reduction over the next four years 

Assuming that: 

• Long-term interest rates rise by 1.50% over the next five years 

• Short-term interest rates remain at current levels 

• Stock dividends remain at current yields 

• Stock market volatility is at historical average 

THE WORST CASE SCENARIO 

Over 3.50% decline in growth cap rates over the next five years 

Assuming that: 

• Long-term interest rates remain at current levels 

• Short-term interest rates rise by 1.50% over the next five years 

• Stock dividends remain at current yields 

• Stock market volatility continues to be high


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© Copyright 2021 M Financial Group. All rights reserved. #3445168.1 Expires 02/2023 1 The Black-Scholes-Merton model is the options pricing model developed by Fischer Black, Myron Scholes, and Robert Merton. The formula is used to calculate the theoretical price of the European call and put option based on five inputs: stock price, strike price, volatility, expected dividends, and the risk-free interest rate. 2 The model assumes life insurer asset allocations do not materially change in the future, meaning they remain primarily invested in investment-grade fixed income securities. Therefore, the returns on investment-grade fixed income securities serve as an indicator of the returns carriers earn in their portfolios.