Universal life insurance products may be divided into two primary categories: current assumption UL (CAUL) and secondary guarantee UL (SGUL). The first UL products, developed in the 1980s, were current assumption products. As the name implies, the performance of a current assumption product largely depends upon the current interest rate, mortality and/or expense factors associated with its block of business.
As prime interest rates declined from a high of 21% in 1980 to a low of 4% in 2003, the interest rates credited frequently caused CA products to not perform as well as the original sales illustrations had projected. As credited interest rates fell, many CA policyholders had to choose among unpopular options: making greater premium payments, reducing face amounts or lapsing or surrendering the policy.
Consequently, a market for secondary guarantee products developed. The early SGULs were designed to not lapse in the early policy years from lack of cash surrender value. By the 1990s, lifetime death benefit guarantees began to appear. SGUL has become quite popular especially in the older-age and asset-transfer markets. However, for executive compensation plans like executive bonus and non-qualified deferred compensation funded with life insurance, CAUL may be more suitable.
Reasons to compare
Although SGUL has been more popular in recent years, CAUL has significant advantages over SGUL in many cases.
First, when compared to CAUL, SGULs may generate only modest cash surrender values that may vanish by age 85 to 95.
Second, SGUL must often charge higher loads or explicit charges to fund the guarantees in the product. Consequently, SGUL may require higher premium payments or generate lower cash surrender value when compared to a CAUL product, especially at younger ages.
Third, SGUL tends to be less flexible than CAUL. For many SGUL products, missing a premium or series of premiums shortens the guarantee (i.e., the death benefit may not be guaranteed for the life of the insured), but the charges for the guarantee will continue. Even if the SGUL has a “catch-up” provision, the cost of exercising this provision may be prohibitive. Most CAUL products have no secondary guarantee premiums and will only stay in force as long as cash surrender values are sufficient to cover the monthly charges and costs of insurance.
Fourth, policy loans or withdrawals may significantly shorten the guarantees in an SGUL. CAUL products generally have better terms for “preferred loans” or “zero net interest” loans that may permit the policyholder access to cash values on a more favorable basis.
All of these factors can make CAUL a better product for certain clients. Essentially, clients who are willing to take the greater interest rate and cost of insurance risk in a CAUL may receive significantly greater cash values that they may access on more favorable policy loan terms than would be possible with a SGUL.
The primary difference between the two products is in their underlying purpose: the need for the security of a guaranteed death benefit versus the desire to accumulate greater cash values or for the chance to obtain death benefit protection for a lower outlay. The advantages of CAUL versus SGUL should be evaluated only after determining one’s need.
CAUL will appeal most to those for whom the purpose of SGUL does not exist. This may include those who are more interested in cash values or are willing to accept additional policy performance risk in exchange for a potentially lower premium outlay.
One should examine competitive illustrations closely. During periods of falling interest rates, companies that credit interest on “new money” as opposed to “portfolio” rates may find their CAUL products uncompetitive. Of course, the reverse may be true during periods of rising interest rates.
Current interest rates are among the lowest we have had in the last 30 years. If a CAUL product looks good now, it may look even better if interest rates rise in the future. Strong cash values may give a policyholder good options for the future. The policyholder may be able to tax-free exchange a higher cash value CAUL product for a new product that best suits his needs.
Executive bonus example
Let us assume you have a 45-year-old male client, and his employer wants to provide him with an executive bonus plan funded with life insurance. You want to compare how CAUL and SGUL meet their objectives.
The employer wants to bonus $15,000 per year for 20 years to fund a life insurance policy of $1 million on your client’s life. When he retires at age 65, the client would like to withdraw $30,000 per year from the policy for 10 years, but he also wants the policy to have a high cash value and a death benefit until his age of 100 or greater. He additionally wants to compare the cash values and face amounts after such withdrawals are made from SGUL and a CAUL respectively. Clients are in the best underwriting class.
The graph shows hypothetical CAUL and SGUL cash values. The illustrations have the premium and withdrawal patterns described in the facts above.
Several differences should be noted:
? The annual $15,000 premiums for the first 20 years produce similar projected cash surrender values in the CAUL and SGUL illustrations. In year 20, the CSV of the CAUL is $408,405, and the CSV of the SGUL is $377,152. That’s a difference of about 8%.
? The withdrawals of $30,000 from policy years 21 through 30 have a greater impact upon the CSV of the SGUL illustration. By year 40, the SGUL cash value is $138,000, while the CAUL cash value is $258,941. Both policies have about a $699,000 death benefit at this point.
? The SGUL lapses in the 48th policy year. The CAUL does not lapse until the 57th policy year.
The different performance of the policies is attributable to a number of factors, of which one is the additional charges for the guarantees in the SGUL. However, under these assumptions, the CAUL meets the combined policy withdrawal, cash value and death benefit objectives of the client better than the SGUL.
Gary Underwood, JD, CLU, ChFC, is an advanced marketing attorney for Genworth Financial, Lynchburg, Va. You can e-mail him at