The Motley Fool Discussion Boards
Investing/Strategies / Retirement Investing
|Subject: Re: IUL credits *include* Dividends||Date: 9/23/2013 3:55 PM|
|Author: synchronicityII||Number: 73218 of 75384|
You're right that the effect of dividends is not the same at different option strikes. The effect is stronger on an option that is more in-the-money (or less out-of-the-money), because that option is more likely to be exercised.
In the case of our annual point-to-point crediting method with a cap, an increase in aggregate dividend yield would make the hedging cheaper, which would mean we could afford to increase the cap (all else being equal).
Forward-looking expected dividend yields on the S&P 500 are historically fairly stable, so I wouldn't expect dividend yields to have a big impact on our caps from year to year.
Hope that helps,
Andy Feldman, ASA, MAAA
AIM Principal, Hedging
Once again, Dave, you CONTINUE to confuse THE METHOD THE COMPANY USES TO INVEST TO PROVIDE RESERVES FOR THE CONTRACTS IT HAS ISSUED with THE CONTRACT TERMS STATING WHAT AMOUNTS ARE CREDITED TO THE CONTRACT.
I've only stated this...what, three times now? Ray has stated the same thing. I can't believe that you don't understand the difference at this point, and somewhat surprised that you continue to make a statement directly contradicted by the literature provided by the issuing companies. And before you tell me "Read what the3 actuary said (becuase believe it or not, I did and understand it completely), readers will note that the actuary is NOT saying "dividends are included in returns", in fact he specifically states "point to point crediting method with a cap" and then says that the insurer COULD choose (but is not required) to increase the cap IF their hedging strategy was less expensive, which an increase in dividend yield would cause IF "all other things are equal".
The fact that the insurance company makes overall pricing decisions (in this case, a decision regarding how high to set the "cap") based on anticipated costs is NOT AT ALL the same thing as saying "dividends are included in the returns".
For example, even if dividend yields went up, the issuer could choose not to increase the cap if mortality experience was worse than their expectations. Or if lapse rates are lower than their expectations. Or if any of a dozen other things happen. Heck, the insurer could simply choose not to increase caps even if none of those things happen, as the language of the contracts (as presented in links on this forum) DO NOT OBLIGATE THE ISSUER TO DO SO! Ray has posted this before, specifically quoting the "at our discretion" language directly frmo the issuer's documentation.
Anyone complaining that IULs credits do not include dividends can be recognized as uneducated, or willfully disingenuous.
You can choose to define the phrase "includes dividends" in any way you like, but it reminds me of the famous quote attributed to Abraham Lincoln "How many legs does a lamb have if you count the tail as a leg?" "Four, because calling the tail a leg does not make it so!"
|Copyright 1996-2014 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us|