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Universal life and variable universal life contracts with secondary guarantees could soon have new actuarial requirements for determining nonforfeiture values if work on an actuarial guideline continues at its present pace.

Actuarial Guideline XYZ will get a further airing and could be voted on during the fall meeting of the National Association of Insurance Commissioners next month and fully adopted in December.

This guideline applies only to secondary guarantees that extend for more than 20 years or extend beyond age 70 of the insured. In the case of more than one insured, the guideline applies if the guarantee extends beyond age 70 of the younger insured.

Frank Dino, a life actuary with the Florida insurance department, emphasized the need for the guideline, explaining that if there are 30-, 40- and 50-year guarantees, it is more like a fixed policy and should therefore have a nonforfeiture guarantee.

If a company is making an interest rate guarantee, then it is a fixed benefit whether it is in a fixed or variable life contract, Dino adds.

William Schreiner, a life actuary with the American Council of Life Insurers in Washington, says it was always the intention of a group of industry interested parties to include VUL products in the guideline. “Intellectually, it makes sense to include these products,” he says.

However, he adds, there is a practical issue of tracking values of VUL’s investment baskets. It will be different than tracking the values of UL policies, Schreiner says.

If the policyholder elects to terminate a universal life insurance policy while the secondary guarantee is in force, the draft model states that the minimum non-forfeiture benefit would be the greater of: a) the net cash surrender value of the universal life insurance policy that would be paid in the absence of the secondary guarantee, or b) the net cash surrender value of the secondary guarantee.

During a recent conference call, regulators voted on two actions: one was whether to include VUL products under the scope of the guideline and the other was what the interest rate should be in the calculation to determine the minimum cash surrender value for the secondary guarantee.

That calculation uses an interest rate to determine the present value–or what a value in the future is worth today–of death benefits, guaranteed payments and expense allowances.

Not including abstentions, regulators were evenly split on whether to use actual investment returns or a 4% rate for policies with no minimum rate. Policies with no guaranteed interest rate used to calculate a policy value would use that 4% rate.

Arguments for a required calculation of 4% suggested that a specified death benefit subject only to payment of a minimum level premium functions in a way similar to a fixed product and should be subject to nonforfeiture standards.

But a counterargument held that a fixed rate is contrary to the variable nature of the returns of these products.

Members agreed more on the inclusion of VUL contracts in the scope of the guideline. Six regulators voted to include VUL, one voted for a carveout and four abstained from voting.

If the guideline is adopted, the effective date still needs to be worked out. Dino, who is spearheading the guideline’s development, argued that the effective date should be January 2003. Insurers suggested that a January 2004 effective date is more realistic.


Reproduced from National Underwriter Life & Health/Financial Services Edition, August 27, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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