Recommended Reading

Abstract: The surrender charge provisions within most universal life (UL) and variable universal life (VUL) policies help insurers recover initial expenses, discourage early surrenders and face amount reductions, and limit the amount of partial withdrawals and policy loans. But another role for a policy’s surrender charge, which dates back to the early days of UL, is as a key factor in determining when the policy might lapse for insufficient value. The traditional paradigm regarding such a lapse is really quite simple—as long as the policy’s fund value can cover the monthly deduction, the life insurance coverage remains in force. Perhaps that paradigm was never entirely valid to begin with; this author estimates that as many as half of all existing UL and VUL policies have verbiage that causes them to lapse on the basis of their surrender value, i.e. when their fund value minus the applicable surrender charge can no longer cover the monthly deductions. That kind of provision is counterintuitive to the perceptions of most policyowners (and most agents as well), and for that reason, insurance companies need to be doubly certain that their disclosures on this point are crystal clear.

Abstract: Whenever an agent uses an illustration in the sale of whole life or fixed universal life, current regulations require the insured / applicant's signature, essentially acknowledging receipt of a complete illustration and various understandings regarding any "nonguaranteed elements." Quite often, however, the insurance company issues the policy differently than was depicted on the original sales illustration - perhaps with a change in face amount, or with an additional benefit added (or deleted), or with a different risk classification than had been originally assumed. In these circumstances, current regulations also require that the agent provide a revised illustration to the insured / applicant so that he or she can then assess the impact of the change on the policy's anticipated performance (both guaranteed and otherwise). For a variety of reasons, the batch of most recent illustration regulations, including those pertaining to this particular provision, specifically exempted variable life insurance from their purview. Many companies, nevertheless, provide a revised illustration for variable life - because it is the right and proper thing to do. But there are still some companies and agents that do not follow this procedure who have been subject to enough litigation to suggest that the National Association of Insurance Commissioners (NAIC), which sponsored the current regulations to begin with, should revisit the issue of variable life insurance sales illustrations.

Abstract: This tutorial begins with a basic explanation of the conservative assumptions underlying whole life premium and then provides a brief overview of dividends that are paid on "participating" policies – what they are, the factors that contribute to them, how they are determined. The tutorial goes on to describe the four basic dividend options and the two not-so-basic term dividend options. After identifying the five different methods of paying whole life insurance premiums, the tutorial addresses the underlying structure of "vanishing premium" sales illustrations and the "paid-up" terminology that agents and insurance companies so fallaciously used in the 1980s. The tutorial concludes with a discussion of policy loans, policy loan interest, and the effect of both on policy values.

Abstract: This tutorial examines the three generally negative perceptions that characterized whole life insurance which universal life was designed to overcome – expensive premiums, lack of flexibility, and a poor rate of return. Universal life actually changed the significant paradigm regarding life insurance, from one in which the premium was uppermost (had to be paid every year) to one in which the premium was secondary to the policy's cash value account which had to be maintained at a sufficient level to cover the deductions that were taken from it every month. The tutorial discusses these various deductions and other cost factors. The key to understanding universal life lies in the difference between the policy’s "current" factors and its guaranteed factors. Determining a universal life premium is almost never a simple look-it-up-in-a-rate-book (as is the case with whole life), and the tutorial explains how a universal life premium is usually determined. The tutorial goes on to explain the limitations and risks inherent in every universal life insurance policy – namely the insurance company actions and the policy owner-initiated actions that can impact its ultimate performance.

Abstract: This tutorial examines the context in which variable universal life (VUL) emerged, i.e., VUL essentially is a by-product of fixed universal life which had entered the life insurance product arena in the late 1970s and early 1980s as an alternative to whole life product designs. It is in the area of investment return that differentiates VUL products from fixed universal life products. Premiums are invested in one or more separate accounts each of which behaves very much like a mutual fund. Each separate account has its own investment objective, and the performance of each separate account reflects the underlying performance of that separate account’s own set of investments. VUL policies are considered to be securities and must be registered with the SEC and FINRA. VUL policies have most (if not all) of the flexibility that characterizes fixed UL policies with respect to premium payments, face amount changes, and cash value accessibility. But just like fixed UL policies, VUL policies must maintain a sufficiently large cash value account (or cash surrender value account) to cover the policy’s monthly deductions. The tutorial uses graphs and charts in a discussion of the various limitations and risks associated with how VUL policies are illustrated and sold. Finally, the tutorial discusses a process that assesses the risk of premium inadequacy with iterative testing of various investment scenarios ("Monte Carlo" testing).