Knowing the advantages of any given policy is a vital step in making the right decision. However, disadvantages should also be addressed to help make the most educated decision. Below are 5 common disadvantages to a Current Assumption Whole Life Policy:
- In the early years, the amount of protection is lower relative to the premium spent with CAWL than with term insurance. However, later, as term rates rise while the premium for CAWL remains relatively level, the reverse typically will be true.
- Surrender of the policy within the first five to ten years may result in considerable loss because surrender values reflect the insurance company’s recovery of sales commissions and initial policy expenses. In addition, most CAWL policies levy surrender charges rather than up-front fees or loads. These surrender charges generally decline each year the policyowner holds the policy. After approximately nine to fifteen years, depending on the company and policy, the insurer no longer assesses any surrender charges if the policyowner surrenders the policy.
- Although traditional participating whole life policies are indirectly “interest-sensitive,” mortality and expense charges are guaranteed. In contrast, current assumption policies only guarantee that mortality charges and expense rates will not exceed certain maximums. Consequently, policyowners bear more of the risk of adverse trends in mortality or expenses than if they owned traditional whole life policies. Conversely, if the trend of mortality costs and expenses improves, CAWL policyowners may participate in the improvement through lower charges.
- Some CAWL policies, similar to many traditional whole life policies, use what is called the “direct recognition” method to determine amounts the insurer credits to cash values subject to policy loans. Under this method, the insurer credits with the current rate only the portion of the cash value that is not used to secure a loan. The insurer credits amounts backing the loan with the minimum guaranteed rate or a rate usually one to two percentage points lower than the loan rate. Policies that have fixed loan rates most commonly use the direct recognition method. Typically, policies with variable loan rates, (and some with fixed loan rates) do not employ the direct recognition method and instead credit current rates on the entire cash value without regard to loans.
- A CAWL policy will lapse if the policyowner does not pay the premium. However, some policyowners may view this feature as an advantage because it forces them to pay the premiums regularly. CAWL differs from universal life in this respect because a UL policy will not necessarily lapse if the policyowner misses a premium payment.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM