1. Understanding Index Segments and Index Credits
HealthMarkets
Understanding Index Segments and Index Credits
HMIA000392

2. Overview
The potential for cash value growth in an insurance contract is an important consideration for our clients. This course is designed to help you understand the basics of how index based products credit interest.
Index insurance products provide a unique opportunity for potentially higher rates of return in today’s low interest rate environment. However, it is important we understand how these products work to determine suitability.

3. Interest Crediting Methods
Fixed Interest
A specified rate of return based on current interest rates and secured by the assets of the insurance company ‘s general account. Fixed interest rates are subject to change but have a contractually guaranteed minimum rate of return.
Example:
Current: 4.25%
Guaranteed: 2%
There are several methods used to credit interest to life insurance and annuity products. The first way is by crediting a fixed interest rate to the cash accumulation value. Fixed interest rates are determined in advance and can change from time to time based on the financial marketplace. These cash values and interest rates are backed by the assets in the insurance companies general account. There is also a guaranteed minimum interest rate. The current rate can fluctuate but never go below the guaranteed minimum rate.

4. Interest Crediting Methods
Index Credits
Interest is credited by measuring the percentage of change in a given market index over a specified period of time, usually 1-year but it may be longer. These contracts usually have a guaranteed minimum rate of return (floor) and a maximum rate of return (cap) or participation rate.
Example:
Floor: 0%
Cap: 10%
Another way to credit interest is by using Index Credits. When we use Index Credits the interest to be credited is not determined in advance. We monitor an Index and a period of time, usually one year, and at the end of the period calculate the percent change from the prior year. If the Index has a positive return, interest will be credited to the policy with the same percentage, up to a maximum interest credit called a Cap. If the Index has a negative return from the prior year, a minimum amount of interest will be credited. This is called the floor. It is generally 0 – 1%.
In place of a Cap some policies use a Participation Rate. Without a Cap there is unlimited potential for increase but it is limited to the participation rate which can vary from 65% to 90%.

5. Interest Crediting Methods
Variable
Cash values grow or fall based on the performance of separate accounts, and are invested in stocks, bonds and other investments. Policy owners select from different separate accounts available in the contract. Risk & reward are born by the policy holder. Agents offering these types of policies must be registered representatives. HealthMarkets Insurance Agency does not offer or support the sale of variable products.
Variable products have the cash values invested in security products such as stocks and bonds. These investments are held in Separate Accounts, which is separate from the companies general account. Agents who sale variable products must be a Registered Representative with FINRA.
HealthMarkets does not sell or offer any variable products. Non registered agents (HealthMarkets agents) cannot give any advise to clients regarding variable products they personally own.

6. Index Contract Basics What is an Index What is a Floor
What are Index Credits
To better understand Index Crediting and how it affects the cash accumulation let’s take a closer look at Indices, floors and Index Credits.

7. What is an Index Market Index Common Indexes
A method a measuring the value of a section of the market. It is computed from the prices of selected stocks or bonds (usually a weighted average)
Indices may be classified in many ways but are usually national, regional, global or for a specific sector of the market, like real estate.
National indexes are often used as a proxy for that nation’s economy.
Common Indexes
S&P 500
Dow Jones Industrial
Hang Seng
EuroStoxx 50
An Index tries to measure the general movement of a market. For example, the US stock market can be represented by several indices, including the S&P 500, the Russell 2000 and others. The Index monitors the price or movement of all the underling securities that are represented by the Index. The Index does not own any securities but is more of a tracking system and helps us get a general feel of the current economy.
Indices can monitor the stock market, bond market or just a specific sector within a market.

8. What is a Floor Floor Example:
A floor is the minimum, guaranteed rate of return possible for any Index Segment. If the percentage change from one year to the next is negative, then the interest credited for that segment will be the guaranteed floor. You cannot lose money due to a decline in the market.
Example:
Market Return: -18%
Interest Credited: 0%
As we discussed before, policies contain a Floor to guarantee a minimum interest rate which may be 0%. Perhaps the most important benefit of having a floor is to avoid losing cash value due to a market decline. This is a wonderful benefit for your client. When there is another market adjustment, like the one we had in 2008, instead of losing 38% of our cash value we simple stop at the Floor and maybe get a 0% for the year. Having a Floor is a great feature to Index Products!

9. Index Crediting Methods
There are different methods of applying index credits to a policy:
Annual Point to Point with a Cap
Annual Point to Point with Participation Rate
Monthly Point to Point with Cap
Monthly Average with a spread
Performance Trigger
There are several ways or methods for determining interest using Index Credits. We will discuss each one in detail to help you understand them better. Different policies and carriers use different crediting methods. A single product may use one or more methods. It is important to know how these methods differ from each other.

10. Annual Point to Point with a Cap
What is a Cap
The cap is the maximum return for any index segment as measured by comparing its value at the beginning and the end of the index segment. You can earn less than the cap but never more. Caps will vary by product (annuities have lower caps than life policies) and by carrier. Caps will change from time to time depending on the pricing of the options market.
Once a segment is opened the cap is locked in for the duration of that segment.
We learned previously that a Cap is the maximum interest that can be credited to a policy. Then we can apply the Cap to an annual point to point method and determine the interest to credit. With annual point to point, we mark or record the value of the index at the beginning of the index segment and then we compare that number to the ending value when the segment closes.
If we open an index segment and the index is at 1,000, and a year later at the close of the segment the same index is at 1,100. The percent change would be 10%. The client would be credited with interest up to the cap. If the cap was 10% or higher they would receive the full 10%. If the cap was lower than 10%, say 6%, they would only be credited with that amount.
The next year’s segment always opens or starts where the old segment ended. So in our previous example, if our segment ended at 1,100 then our new segment would begin at 1,100. Whether or not we earn interest next year depends on the index closing higher or lower than 1,100. We always compare a point in time this year to a point in time next year – so Annual point to point.

11. Caps Continued Example 1: Example 2:
Percent change in the Index: 15%
Interest credited: 10%
Example 2:
Percent change in the Index: 6%
Interest credited: 6%
You receive full credit up to the cap.
Example one shows interest being credited at the cap, example two would be credited with interest less than the cap, but the full amount of the percent change in the market. If the change in the market is negative then we receive the interest rate associated with the floor.
Remember, with a one year segment, no interest is credited during the year. It is only credited at the end of the segment, whether that be 1, 2, 3 or 5-years.

12. Annual Point to Point w/ Participation Rate
Participation Rates
With a participation rate there is no cap, or upper limit to the possible interest that can be earned. This strategy bases interest credits upon a predetermined percentage (called the participation rate) of the percentage change in the Index, as measured by comparing its value at the beginning and the end of the index segment. The participation rate is declared in advance.
Example:
Percent change in the market: 10%
Participation Rate: 70%
Interest credited: 7% (10% x 70%)
An annual point to point with a participation works in the same way as the previous discussion with one change. In place of a Cap we have a Participation Rate to determine how much interest to credit. When there is no Cap there is no limit to how high the interest can be. We are only limited by our participation that is allowed. Participation rates can range from 65% to 90%. At the end of the segment we determine the percent change in the Index and then multiply that by the participation rate to determine the amount of interest to credit, as shown in the example.

13. Monthly Point to Point with a Cap
The percent change in the index is measured each month and then the 12 percentage changes are added together to determine the annual interest credited.
Positive months have a cap applied, but negative months have no floor and the entire percentage is included.
One bad month can negate 11 positive months and result in a 0% interest credit for the year.
When using a monthly point to point, instead of looking at the index only once a year we look at it each and every month. If there is a positive change for the month (over the prior month) we record that gain up to the Cap. So if we have a Cap of 1.5% and a positive gain of 3% then we would record the 1.5% since that is the Cap. If the gain was 1% we would note 1%. We also track the negative months. Unlike the annual interest that has a floor of 0%, the monthly change does not have a floor. If the monthly change is a -3% we track that as well.
At the end of the policy year we add together all the positive and negative changes to arrive at a return for the year. If it is positive then interest is credited to the policy. If it is negative then we stop at the floor of 0%.

14. Monthly Point to Point Example:% % % % % % % % % % %
Add and subtract all 12 numbers together and you will come up with a positive 2.5%. The policy would be credited with 2.5% interest for the year.
This is an example of how a monthly point to point might look on an annual statement. Just keep track of all the monthly numbers and add them together. This strategy can work very well in a recovery market after a correction.

15. Monthly Average
Each month we record where the Index is on that day (for example, the 15th of each month). At the end of the policy year we add the 12 monthly Index numbers and divide by 12 to arrive at our monthly average. Some contracts then deduct a spread and others are spread free.
If the average is negative then 0% interest is credited for the year.
The monthly average looks at the Index every month on the same day. For example the S&P 500 might be at 1,863. Add all twelve months together and divide by 12 to get the average value of the S&P 500 during the year. Then look at the percent change between the starting point and the average value.

16. Monthly Average Example:
2 1,892
3 1,852
4 1,847
5 1,879
6 1,860
7 1,840
8 1,852
9 1,897
10 1,885
11 1,918
12 1,933
Add all 12 numbers together and divide by 12. Compare that number to the starting number in month one. Find the percent change.
This is an example of how a monthly average might look on an annual statement. Just keep track of all the monthly numbers and add them together.

17. Performance Trigger
A performance trigger is set at the beginning of the contract year. At the end of the year if the percent change in the market is positive you are credited with the trigger percentage regardless of the percent increase.
Example:
Trigger: 4%
Market Return: 1% - 10%
Interest Credited: 4%
The Performance Trigger is set at the beginning of the policy year. As long as the percent change at the end of the year is positive, even 0.5%, then the trigger is credited to the policy.

18. Index Returns
Interest credited to Index insurance products is determined exclusively by measuring the percent change in the index from one point to another, it does not take into account the payment of dividends.
Total rate of return for a given index is comprised of the change in the index price PLUS the payment of stock dividends. As a result, commonly published performance results will be higher than the rate of interest credited to an index insurance product.
Index returns are usually calculated on a monthly (April 1 – 30) or an annual (January 1 – December 31) basis. Index segments will have different starting and ending dates and will differ from commonly published returns.
Remember, interest is credited to the policy at the end of the index segment. It is determined by the change in the value of an index. Because we are looking just at starting points and ending points, the interest credited to the policy may be different than published returns printed in various publications. Many times periodicals publish returns from the 1st to the 30th of the month or from January 1st to December 31st. Published returns may also include dividend returns. Be careful not to compare published returns to your policy because they are for different time periods and use different calculations to determine returns.
Index products are fixed interest products and we do not refer to them as investments.

19. Index Segments
Index Universal Life and Index Annuities are fixed interest products. The interest credited is determined by the percent of change in an index over a given period of time.
You are not investing in the market.
You are not investing in stocks or bonds.
You are not investing in an Index.
Returns are established by taking the price of the Index today and then again at some point in the future. Is it higher or lower than when we started? If higher then the following are applied
Participation Rate (% increase x participation rate = Interest earned)
Cap (% increase up to the cap = Interest credited)
Our clients are paying premiums on insurance products. They are not making deposits into investments. We do not invest in the market, in stocks or bonds and we do not invest in the Index. We just simply use the Index to determine the amount of interest to credit to the policy.
An index segment is established to determine a beginning value and an ending value of an index.

20. Index Segments, cont.
Index Segments are usually opened on one day each month. This might be on a specific date, like the 28th or the date might change, like the 3rd Friday of the month.
An annual segment opened on April 28, 2014 will close April 28, 2015.
It doesn’t matter what happens during the year, the Index can go up and down as much as it wants. All that matters is where the Index is on the closing date.
Index segments are only opened one day a month. This date can vary by company. It is important to know when the segment will be opened. Premiums paid prior to the opening date are held in a fixed account until the date a segment can be opened. App allocated premiums are then swept into the index accounts. Index segments are open for 1, 2, 3 or 5-years depending on the product.

21. Index Segments, cont.
An Index Segment is opened each time a premium is credited to a policy.
Annual premiums have only one segment open during the year.
A monthly EFT premium will have 12 index segments open during the year.
Dollar Cost Averaging takes an annual premium (or semi- annual, quarterly) and opens a segment every month with a portion of the premium.
Index segments are opened every time a premium is paid. If you are paying annual premiums then you only have one index segment that is open. With monthly EFT premiums a new segment is opened every month and you have 12 revolving segments at the same time. If you want to pay annual premiums but you want a segment opened every month, use dollar cost averaging.
Dollar cost averaging places the annual premium into a fixed account and then each month 1/12 of the premium is transferred into an index segment.

22. Index Segments, cont.
The initial Indexed Account segment will have an initial term, say 1-year, but may be up to seven days less or seven days more. At the end of the term of the initial segment, and for as long as the amount transferred (less charges) remains in the account, successive segments will be created.
The new segment starts where the old segment ended.
Even though segments are scheduled to be opened on the same day every month, the actual date may vary due to weekends or holidays when the market is closed. New segments always start where the old segment ends.

23. Index Segments
January 2012
S&P
January 2013
S&P – %
February 2013
S&P – %
February 2012
S&P
March 2012
S&P
March 2013
S&P – %
April 2012
S&P
April 2013
S&P – %
Many companies have interest crediting histories that can be found on their websites showing the past interest that was actually credited. Understanding interest credits, index segments and crediting methods is important when explaining these products to your clients.
May 2012
S&P
May 2013
S&P – %
This can be a 1-Year, 2-Year, 3-Year or 5-Year segment, depending on the product.

24. Credit History
Each new Index segment starts where the old segment left off. The client receives interest up to the cap on that segment.
As you look at the past history and interest that has been credited remember, past history is no indication of future interest. HealthMarkets agents are not registered Representatives. We do not discuss the stock market or give investment advise.

25. Historical Rates
There are periods of time where the market has done very well and index credits have been good.
The most recent history has been vary favorable for index products. Higher returns in a strong market makes these products attractive but we cannot base our clients future expectations on a strong recent history.

26. History Cont….
This is not always the case. There will be months with negative returns and 0% interest credited.
We need to make sure our clients understand that there will be times with lower returns and some years when the return will be 0%. Help set realistic expectations with your clients. Do not make predictions, set high expectations or any type of guarantees. We just explain the opportunity that an index product offers and how it might be beneficial to our clients.

27. Suitability
It is your responsibility to ensure that the product you recommend to your client is suitable for their needs
Follow the insurance carrier’s guidelines for determining suitability of a product for your client
In addition to understanding how indexing works for the product, your client also needs to understand other features of the plan, such as surrender charges or penalties for early surrender/termination of the contract, when funds are available for withdrawal and the charges or loss of interest that may apply

28. Summary
Index products are not securities or investments and are not regulated as such.
These are fixed interest products issued by insurance companies and sold by life insurance agents.
Index products offer potentially higher returns than traditional fixed interest products.
Index products offer higher potential returns but have the benefit of a floor.
You can never lose money due to a market decline.
In summary, Index Products are not investments or securities. They are fixed interest products, issued by life insurance companies and sold by life insurance agents. They offer a potential for higher interest rates than traditional fixed interest products in a low interest rate environment. Perhaps one of the greatest benefit in an index product is the floor. You can never lose money in your policy due to a decline in the market.

29. Summary
Be an informed agent and help educate your client on how index products work. Use carrier provided materials. Give fair and complete disclosure.
Index products add another dimension to your product portfolio and will help you in growing your business.
It is your responsibility to be well informed regarding the products you sell and the carriers you represent. Always give full and fair disclosure of fees and expenses. These products offer many advantages for our clients and can help you in growing your insurance business.

30. Thank you.