Risks Inherent in UL-VUL Policy Designs

Risks Inherent in UL-VUL Policy Designs

During the past decade we have experienced interest rate and equity market environments that have produced results that were far lower than might have been illustrated on universal life or variable universal life insurance policies at time of issue.

When Interest Credited to the policy is LOWER than illustrated, then:

The Net Amount at Risk is greater than expected, resulting in a larger than expected monthly charge for cost of insurance, which leaves fewer dollars available in the account value, resulting in . . .

The account value being smaller than expected resulting in a smaller amount of interest being credited . . . and the cycle continues.When Mortality Costs are LARGER than illustrated, then:

The monthly deductions for cost of insurance are larger than expected, which leaves fewer dollars available in the account value, resulting in . . .

The account value being smaller than expected resulting in a smaller amount of interest being credited . . . and the cycle continues.When Expense Loadings in the policy are LARGER than illustrated, then:

The monthly deductions for cost of insurance are larger than expected, which leaves fewer dollars available in the account value, resulting in . . .

The account value being smaller than expected resulting in a smaller amount of interest being credited . . . and the cycle continues.How can the interest credited to the policy be lower than expected?

1. Lower interest rates being credited by the insurance company

2. Fewer dollars than expected in the account value, resulting in fewer dollars actually earning interest.What happens when prevailing interest rates in the marketplace are less than the rate guaranteed by the insurance company?

The insurance company has two more components that they can adjust. They can raise mortality costs or they can raise expenses, subject to the contract maximums, of course.

If your clients continue on their current course, which graph will your clients existing universal life / variable universal life policies look like?

THIS OR this?

Given the interest rate and market conditions that we have experienced over the last 10 years, conducting a policy audit is highly recommended. We can assist you or your clients conduct policy audits to determine whether mid-course adjustments are appropriate.

Contact me for details:

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.

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