Single Premium Variable Whole Life Insurance

Only a relatively few companies offer single premium variable life policies. This product is very similar to single premium current assumption life, with one important difference. The similarities include guarantees that:

  • The policyowners will never have to pay additional premiums to keep the policy in force.
  • The face value will never fall below the initial face amount of coverage.
  • Mortality charges will never exceed specified maximums.
  • The growth of the cash value will depend on the investment performance of the assets backing the policy.

The key distinction is that the single premium variable life policy does not guarantee that the company will credit at least a minimum rate of interest to cash values; in fact, it does not guarantee any level of cash value. In other words, policyowners who purchase single premium variable life contracts bear virtually all of the investment risk associated with their policies.

The lack of a minimum interest rate guarantee has several corresponding consequences. First, because the company does not have to earn a minimum rate on the investments backing the policy, the insurers can give the policyowners wide latitude in choosing the types of investments into which they will invest the cash values in their policies.

Policyowners can choose to allocate the premium to a number of mutual fund-type accounts that typically include:

  • diversified common stock accounts;
  • fixed income (bond-type) accounts; or
  • money market accounts.

-Some companies offer a wider range of specialized accounts that are invested in such vehicles as zero coupon bonds, mortgage-backed securities, nondiversified (industry sector) common stocks, gold, real estate, and foreign equities or bonds.

Second, generally policyowners are also given considerable flexibility in transferring funds between accounts. Some companies allow virtually unlimited shifts between accounts without charge, but most companies limit free transfers to between two and five times per year. Insurers usually impose a transaction fee for transfers in excess of the specified number per year.

Third, the securities laws treat variable life as a security and, as such, it is subject to regulation by the Securities and Exchange Commission (SEC) as well as by the state insurance regulators. This means that prospective policyowners must be given a current prospectus describing the investment characteristics of the product, similar to that which is given to mutual fund investors. Only persons who have passed a specific securities examination may sell single premium variable life contracts. Also, the SEC requires that policy illustrations include projections based on several specified rates of return. The illustration may include additional projections, but the assumed rate of return may not exceed an upper limit.

The assumed rate of return in policy projections is extremely important so one should keep the assumed rate in perspective. Although market rates of returns on bonds and equities vary and may be extremely high for some relatively short periods of time, projections should be based on realistic long-term trends.

What is a reasonable and realistic long-term rate? The long-term average compound annual rate of return on the S&P 500 stock index (which is considered by many experts as the “best indicator” of the U.S. equity market performance overall) for the forty-year period from 1972 through 2011 was about 9.8 percent. The average for long-term corporate bonds and government bonds was about 8.8 and 9.0 percent, respectively. For intermediate-term government bonds, the return was about 7.8 percent and for Treasury bills was about 5.47 percent. So, depending on the asset mix selected by the policyowner, long-term projections using rates exceeding 10 percent would appear overly aggressive and unrealistic.

Similar to single premium current assumption policies, the company will automatically increase the face value of variable life coverage to remain within the section 7702 definition of life insurance if the investment performance of the policyowner’s account(s) exceeds that assumed when the company set the premium. However, if the investment value of the policyowner’s account(s) later declines, the face value of coverage also will decline, but never below the initial face amount.

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

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