UL Secondary Guarantees

[TJF]

When the secondary guarantee "kicks in" for a UL product (current account is not sufficient to cover charges and either the shadow account is positive or the cumulative premium requirement has been met), what happens to your current account? Does it continue to go negative or do you keep it at zero and waive the monthly deductions? Are you aware of any regulators that require one of these approaches?

Thanks.

[A Student]

One common secondary guarantee that I'm familiar with is when the policy lapses if the CV <0 (or next monthly deduction), but there is a guarantee based on minimum premium. In this case the AV kept performing the same way as without the sec guar. I'm guessing that the AV rollforward would be the same regardless of the sec guar in any case (even if AV was negative) unless there was something in the contract specifically stating a different process.

[BigEEE]

We continue to take out charges but I don't believe we credit negative interest and the NAAR is capped at Face.

[mayreeh]

We have several admin systems and the answer depends on the system. Generally speaking though - no negative interest and cap the NAR at something. OTher charges keep coming out.

[JMO Fan]

It's interesting that the primary guarantee of whole life
is called a secondary guarantee for UL.

Considering the general lack of account value regulation, it's almost surprising that more games aren't played. :shake:

[BigEEE]

It's interesting that the primary guarantee of whole life
is called a secondary guarantee for UL.

Considering the general lack of account value regulation, it's almost surprising that more games aren't played.

A lot of games are being played but the NAIC is cracking doen on many of them with AXXX

[JMO Fan]

The demise of XYZ, however, creates an unusual situation. It appears that the general lack of UL expertise among regulators, and the push for speed-to-market, made XYZ not politically expedient. (For the same reason, the UL Model was adopted over the objections of LHATF back in 1983.) It wasn't likely to get any official any kudos or extra votes.

The Annual SoA meeting in Boston included a debate on this (UL vs. WL), so there clearly is a group of industry actuaries who believe XYZ is right. The Standard Nonforfeiture Law can be interpreted (without much trouble) to require minimum cash values if the no-lapse premium is viewed as a fixed premium. Those values, in many cases, would be higher than XYZ would have required. If somebody takes it to court, the company could be forced to provide minimum cash values on all its no-lapse policies.

Approval does not mean the policy is legal -- it's just authority to sell. The lack of UL model requirements is no defense on no-lapse -- it doesn't say anything.
The absence of XYZ does not mean cash values are not required -- the statute (SNFL) always takes precedence over rule (UL Model).

[elleminopee]

It's interesting that the primary guarantee of whole life
is called a secondary guarantee for UL.

It's called a secondary guarantee because the primary guarantee for UL is the guaranteed CV's using guaranteed COI's, guaranteed credited interest, and guaranteed expense loads. The secondary guarantee is for guaranteed coverage only (no CV) provided you meet certain criteria.

[elleminopee]

The Standard Nonforfeiture Law can be interpreted (without much trouble) to require minimum cash values . . .

I think the SNL applied to UL deals more with making sure you surrender charges are less than the unamortized expense allowance. As long as your surrender charge is less than that amount, the SNL does not require a certain $ per unit of cash value.

. . .if the no-lapse premium is viewed as a fixed premium.

The no-lapse premium for most UL products that I know are not viewed as a fixed premium at all. You can pay annually, single pay, or any other short pay scenario that you desire. Also, many products with a premium test allow you to catch-up which means you would be paying much later. A fixed premium means you must pay a certain premium each year. With UL, paying the premium at different times has different implications. Paying early usually means you have to pay less. Paying late often means you must pay more.

[42]

The demise of XYZ, however, creates an unusual situation. It appears that the general lack of UL expertise among regulators, and the push for speed-to-market, made XYZ not politically expedient. (For the same reason, the UL Model was adopted over the objections of LHATF back in 1983.) It wasn't likely to get any official any kudos or extra votes.
I know what XYZ was proposing, but I hadn't been following it for awhile. What happened to it? Is anybody proposing an alternative?

[urysohn]

The demise of XYZ, however, creates an unusual situation. It appears that the general lack of UL expertise among regulators, and the push for speed-to-market, made XYZ not politically expedient. (For the same reason, the UL Model was adopted over the objections of LHATF back in 1983.) It wasn't likely to get any official any kudos or extra votes.
I know what XYZ was proposing, but I hadn't been following it for awhile. What happened to it? Is anybody proposing an alternative?
It's dead, in favor of spending the time and effort on updating SNFL in general.

[JMO Fan]

It's interesting that the primary guarantee of whole life
is called a secondary guarantee for UL.

It's called a secondary guarantee because the primary guarantee for UL is the guaranteed CV's using guaranteed COI's, guaranteed credited interest, and guaranteed expense loads. The secondary guarantee is for guaranteed coverage only (no CV) provided you meet certain criteria.

Whole life guarantees a death benefit if a specified level premium is paid. Most no-lapse guarantees do exactly the same thing-- if the no-lapse premium is paid, the death benefit will be paid. It is because the death benefit is guaranteed that cash values are required. The UL model does not (and cannot) eliminate cash value requirements -- it just limits the amount of load on the accumulation value.

If you insert a flexible premium provision into a whole life contract, but still guarantee the same death benefit if at least the 'specified premium' is paid, you have no-lapse UL. A secondary guarantee may be added -- death benefit is paid if the accumulated value is positive, or if cash surrender value is positive. Both are common UL guarantees -- and others could also be created, a la shadow accounts.

If the majority wants flexibility (and no XYZ), then SNFL should be changed, rather than force fixed forms into unfair competition with UL.

[elleminopee]

It is because the death benefit is guaranteed that cash values are required. The UL model does not (and cannot) eliminate cash value requirements -- it just limits the amount of load on the accumulation value.

The UL model limits that amount of non-level loads on accum value. But as long as the non-level load + SC are less than UEA, you're OK no matter what your CV (even if it's zero). So you can have high % of premium loads and maximum COI's that suck all the accum value out of the product. Your SC and non-level loads may be low enough comply, but since you have no accum value you would have no CV. To me, this is eliminating CV requirements. We illustrate policies all the time that have guaranteed coverage far into the future, but have no guaranteed CV after x years. You can't do this with fixed premium whole life policies, because the prospective CV formula gives you a $/unit amount of CV that you must have. The UL model does not do this at all.

If you insert a flexible premium provision into a whole life contract, but still guarantee the same death benefit if at least the 'specified premium' is paid, you have no-lapse UL. A secondary guarantee may be added -- death benefit is paid if the accumulated value is positive, or if cash surrender value is positive. Both are common UL guarantees -- and others could also be created, a la shadow accounts.

The no-lapse provision IS the secondary guarantee. UL policies with no-lapse provisions contain the no-lapse provision as the secondary guarantee. The DB being paid if AV or CSV is positive, as you mention above, is not a secondary guarantee. UL policies with no secondary guarantees contain these provisions. It's a basic part of UL. Secondary guarantees say that the DB will be paid if certain criteria are met (ie, the shadow account has a positive value, a certain premium test requirement is met). However, you can have this guaranteed coverage and have zero cash value. One has nothing to do with the other.

[JMO Fan]

No-lapse guarantees are not a feature of UL; they are not addressed by the UL Model. When a minimum premium is required to guarantee a death benefit, that's the same guarantee as in whole life. It really doesn't matter whether it is labeled primary or secondary; the Standard Nonforfeiture Law applies to them. So do professional standards.

The states (by dropping XYZ) have apparently decided not to enforce this. The industry XYZ-proponents have argued that CVs are required, but (so far) don't seem inclined to make a legal case of it. This will last until some policyholder gets upset about losing everything after paying 25 years of no-lapse premiums. (Many credited rates on UL AVs are down to guaranteed rates already, with no prospect of rising soon. Remember vanishing premium-UL?)

[42]

My understanding of the way the UL Model Reg and the SNFL interrelate (and I make a point of not trying too hard to understand it, for this would require my trying to understand regulators and the people who work at the various state departments of insurance, which only makes my brain hurt) is that the UL Model Reg was intended to supplement the SNFL, but that almost every state DOI treats the UL Model Reg as though it supercedes the SNFL. In other words, JMO Fan is focusing on the way the states should be doing things theoretically, while Eleminopee is focusing on the way the states actually do things in practice.

Or maybe it's just time for me to take another one of my pills again. :oops:

[JMO Fan]

My understanding of the way the UL Model Reg and the SNFL interrelate (and I make a point of not trying too hard to understand it, for this would require my trying to understand regulators and the people who work at the various state departments of insurance, which only makes my brain hurt) is that the UL Model Reg was intended to supplement the SNFL, but that almost every state DOI treats the UL Model Reg as though it supercedes the SNFL. In other words, JMO Fan is focusing on the way the states should be doing things theoretically, while Eleminopee is focusing on the way the states actually do things in practice.

Or maybe it's just time for me to take another one of my pills again. :oops:

Yes, I think that's pretty fair.

The UL Model was adopted by the NAIC over the objections of the states' actuaries (LHATF). None of those regulators (including the LHATF actuaries) understood it -- which hasn't changed much in the 20 years since it was adopted. Many states never did adopt it, but simply go along with what seems to be standard.

[elleminopee]

Interesting. I did not know this. Here's a quirky question about the theoretical side of nonforfeiture. Suppose you have 2 UL products that are identical except that one has a guaranteed death benefit provided you pay a stipulated premium and the other does not. According to JMO Fan's comment above, it is "because the death benefit is guaranteed that cash values are required". So for the product with the guarantee, you would be required to provide guaranteed CV's, but for the other you would not. Doesn't that seem a little backward? The product without the guarantee should cost the company LESS to offer and be less risky. Therefore it seems that more of the premium should be given to the policyholder in the form of CV. For the product with the guarantee, it is more expensive and more risky for the company. So it seems that less of the premium would be left over for CVs. However, the NF law says you would be required to hold them. Is this strange or am I confused? I guess my basic thought is this: If CV's are required for UL product with a guaranteed DB, it should be required even more for one without.

[Chuck]

The reason that the guaranteed version would require cash values while the other would not, is because the theoretical underpinnings for nonforfeiture requirements is not based on what the company can afford when comparing the two policies, it is based on valuing what future benefits the policyholder would otherwise forfeit if the policyholder terminated the contract. The guaranteed policyholder is forfeiting more.

That being said, the problem with SNFL, XYZ, XXX, and all the other alphabetic attempts to legislate the value of a life contract is that we are getting collectively lost in our socks in patchwork regulations intended to plug loophole upon loophole. If our ONLY concern is being theoretically consistent with the SNFL, then XYZ is a valid "fix". If our ONLY concern is maintaining a level playing for the big mutuals who don't like to offer these policies, but also don't like to compete with them, then this is a valid "fix".

But if the MAIN concern of regulation is doing things to protect and benefit consumers, I have to ask - Do these no lapse provisions do more harm or good to the consumer? If they do more good, then the solution is not to re-enforce the old regulation, but to fix the old regulation (ie SNFL).

On the good side - More guarantees are better than less guarantees and more choice is better than less choice. All other things being equal, a no lapse guarantee improves the policy for the consumer. While a guaranteed cash value (all other things being equal) would also improve the policy for the consumer, we know that such a benefit would raise the no lapse premium and in all likelihood eliminate the value of the benefit (which is really I think the underlying goal of those that don't feel it is fair to compete against these contracts). If consumers want guaranteed cash values at a higher premium, you can bet for durn sure that somebody will offer that option voluntarily.

Most of the really bad things that have happened to life insurance consumers revolve around misleading and arbitrary non-guaranteed elements, not because of guaranteed elements. We should find ways to allow and encourage guarantees.

On the bad side - Consumers can be misled. If somehow they don't realize they can pay for 25 years and have no cash value, then the problem is disclosure and misleading sales presentations. If that's the case, concentrate on fixing the disclosure problem instead of eliminating the choice, because again consumers are more likely to be misled with nonguaranteed elements than they are with guaranteed elements. The other bad side is that lapse supported guaranteed policies could be "mis-priced" and get companies into financial troubles. This theoretically should not be a problem because XXX, AXXX supposedly has addressed this problem (ha!). The solution here again, is not to eliminate a valuable consumer choice, but to have SENSIBLE, LOGICAL and EFFECTIVE valuation requirements.

I have always contended that when you purchase a life insurance policy, you are really purchasing an asset in the same way that you purchase a bond (albeit a very, very complicated bond, with a very complicated options, purchase price and payment schedule). It is a promise to pay cash in the future in exchange for a payment (or series of payments) now. In my opinion, only market forces can determine the true value for this asset, taking into account all the options, benefits, guarantees, and risks inherent in any the particular asset. The solution is to have regulations that allow market forces to become efficient in valuing life contracts. I have proposed ideas on this issue in the past, but the length of this post is already in Andy territory, so I'll leave that for later and get off my soapbox now.

Chuck

[JMO Fan]

Well-put, Chuck. (Don't worry about the length -- it needed to be said.)

The majority appears to feel the same way. That means it's time to move the old laws to reflect the majority view. But that will have to be done with an eye to some consumer protection, or the NAIC won't approve it.

Another UL anomaly, if I remember correctly -- a contract with a 10% lifetime interest guarantee is likely to produce much smaller reserves than with a 3% guarantee. The AAA UL Task Force decided this was not a problem, because 7702/Guideline laws effectively prevent high guarantees.

[Potters]

I am from Asia and haven't heard about the UL secondary guarantee. Is this common feature for UL product? In particular, what is the "no-lapse guarantee" and how does it work?

[oedipus rex]

I am from Asia and haven't heard about the UL secondary guarantee. Is this common feature for UL product? In particular, what is the "no-lapse guarantee" and how does it work?The guarantee is usually given in terms of what is called a "minimum premium." If you pay that premium for a certain set number of years, your policy is guaranteed not to lapse during the no-lapse guarantee period. However, after that period ends, the policy may lapse at any time whether you're paying the minimum premium or not.

[Take 2]

The UL difference from traditional fixed-premium whole life is the potential flexible premium feature. You can generally pay more premium on UL, to pre-fund the death benefit and/or increase cash values (and even death benefits). Or you can pay less. With WL, the premiums and cash values are fixed in advance.

If you don't pay the minimum premium on WL, it lapses, with cash value buying a paid-up policy (ETI or RPU). But on UL, the premiums paid are accumulated into cash values (from which charges are deducted). If you don't pay the minimum no-lapse premium on UL, it will also lapse if there is no accumulated value. But if the UL cash value is positive, the contract will continue on despite the failure to pay minimum no-lapse premiums.
(I assume this is what JMOF labels the UL 'secondary guarantee', which makes some sense if the no-lapse feature is considered equivalent to the WL death benefit guarantee.)

[The Drunken Actuary]

When the secondary guarantee "kicks in" for a UL product (current account is not sufficient to cover charges and either the shadow account is positive or the cumulative premium requirement has been met), what happens to your current account? Does it continue to go negative or do you keep it at zero and waive the monthly deductions? Are you aware of any regulators that require one of these approaches?

Thanks.Great question. And great answers too!