Single Premium Current-Assumption Whole Life Insurance

Most single premium policies are “current assumption whole life,” which are also (somewhat misleadingly) called “interest sensitive whole life.” The interest-sensitive label is understandable, however, because insurers market these policies by focusing on the interest rate that they credit to cash values. They generally guarantee a very competitive rate for at least one year after the policy issue date and sometimes for up to five (and even ten) years. After that, the rate generally depends on the company’s investment and mortality experience.

Actually, current assumption whole life insurance is a type of participating policy where the company’s favorable investment and mortality experience is reflected directly in the interest rate credited to cash values rather than through dividends.

Similar to ordinary whole life policies (and in contrast to universal life policies), current assumption whole life policies usually guarantee that mortality charges will not exceed certain maximums. However, the interest rate the insurer credits to cash values is usually quoted net of mortality and other expenses. In other words, in contrast with universal life policies, the policy illustrations make no explicit recognition of mortality charges. Specifically, the insurer does not break out and separately state the mortality charges. As a result, policyowners will have difficulty determining whether any reductions in the interest rate credited to cash values are attributable to poor investment performance or excess mortality.

To counter this problem, some policies provide that the rate credited to cash values will never be less than a specified percentage of the rate earned on the investment assets backing the policy or on a specified index, such as the government long-term bond index. But this too presents problems because companies’ practices vary with respect to how they determine the return on their assets and how they allocate investment performance to various blocks of policies.

Similar to single premium ordinary life policies, single premium current assumption policies generally guarantee that:

  1. The policyowners will never have to pay additional premiums to keep the policy in force.
  2. The face value will never decline.
  3. The cash values will never fall below a fixed schedule of minimum values based on a guaranteed minimum interest rate (historically, between 4 and 6 percent, but lower in recent years because of lower market rates of interest).

In contrast with single premium ordinary policies, single premium current assumption policies typically specify current and maximum allowable mortality charges. However, this is really a distinction with little practical value because companies will adjust dividends on participating single premium ordinary policies to reflect changing mortality (and expense) experience.

If the investment and mortality experience is favorable, the cash values may grow enough to exceed the amount permissible under the Code section 7702 definition of life insurance for the original face amount of coverage. When this happens, the company automatically increases the face amount to keep the policy in compliance with the requirements. Consequently, similar to single premium ordinary whole life, policyowners generally can expect the total face amount of coverage for single premium current assumption whole life to increase over time.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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