The variable loan rate used in the index life illustration has an tremendous impact on the amount of loan proceeds available. Therefore, it becomes very important to identify a rate that is realistic.
One way to determine a realistic variable loan rate to use for the illustration is to look at the historical average for the Moody's Corporate Bond Yield Average. The historical average over the last 15 years results in a 7.3% rate and the 30 year historical average results in an 8.4% rate. These are historical averages only.
Please see the actual results for the Moody's Corporate Bond Yield Average in the caption below.
Another option would be to use the current variable loan rate. For policy years beginning in 2006, the current variable loan rate is 5.7% and is currently the lowest allowable illustrated Variable Loan rate. Although the current rate will produce the highest loan values, the loan values may be overstated based on the historical averages. Before using the current rate, we recommend that you compare options to determine if it accurately reflects your expectations.
Please see the actual results for the Moody's Corporate Bond Yield Average in the caption below.
See the actual results below of the S & P 500 index (not including dividends) since 1988. A careful review of these returns with a comparison of the Moody's Corporate Bond Yield Averages since 1988 reveals the volatility of using the variable loan rate approach. Make sure that the illustration you are basing your decision on uses a realistic variable loan rate.
