BOLI crediting rates have remained somewhat stable since the beginning of 2018, and programs that deliver 3% or more yield out of the gate are readily available. While those rates have remained stable, market rates have moved generally upward even if in fits and starts. As of March 25, the 10-year Treasury bond was a mere 3 bps higher yield than the 13-week Treasury bill (with an inversion with shorter duration); the result is about 75bps-100bps of spread between 10-year Treasuries and BOLI. That's down from the historical average of over 200bps. That narrow spread has many institutions re-evaluating their inforce BOLI or delaying their next purchase of it. The thought goes that until there is greater reward for the risk of going longer, stay short.
Ignoring the immediate lost earnings from staying on the sidelines, trying to time entry to the markets is challenging to say the least. What if instead of measuring your BOLI returns against fixed-income assets like bonds, you could measure them against an equity-index? Before you get too far on the ledge - we're not talking about exposing cash value to an index; cash values will always have stable book value treatment. What we're talking about is a transparent way to determine the crediting rate by measuring the change in an index, most commonly the S&P 500.
"Indexed Universal Life" or IUL has been available on a retail basis for more than 20 years, and in 2018 IUL accounted for almost 30% of permanent life sales. While widely available on a retail basis, it wasn't until recently that IUL became available with a single-premium, 100%-beginning-cash-value design associated with BOLI.
With IUL, the carrier offers a "floor" or minimum crediting rate (along with full book-value treatment) and a "cap" or maximum crediting rate that can flow from the change in the index.
- If the index is negative or below the floor, your crediting rate is the floor.
- If the index is greater than the cap, your crediting rate is the cap.
- If the index is in between, your crediting rate is the index.