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Universal Life Insurance

Last Updated 10/4/19

Issue: Universal life insurance is permanent life insurance combining term insurance with a cash account earning tax-deferred interest. Under most contracts, premiums and/or death benefits can fluctuate, both by timing and amount (within the contract's bounds), at policyholder discretion. The policy stays in effect as long as the cash value is sufficient to cover the cost of insurance. Additionally, the insurer may offer a secondary guarantee that keeps the policy in effect even if the cash value will not cover the cost of insurance. Like whole life, loans can be taken against the cash value of the policy.

Interest-crediting rates for traditional universal life policies are set by insurers. As such, their reserves are general account liabilities, which ensure that obligations under the policy are backed by the insurer's assets. In the 1980's a new variation of universal life was developed called variable universal life insurance. Fund values for variable universal life insurance, are kept in an insurer's separate account and interest accrued under these contracts are not guaranteed and may in fact be negative since interest is a function of the change in the market value of the separate account assets. As a separate account product, the policyholder may choose from a variety of underlying investment accounts whose values fluctuate with the performance of the underlying assets. Recent years have seen the rise of indexed universal policies, which have both fixed and variable features. Under these policies, interest credits are linked to external index of investments, such as bonds or the S&P 500. These index products do provide an interest rate guarantee.

Overview: Prior to the 1980s, insurers sold primarily fixed-premium term and whole-life insurance to individual policyholders. With competitive pressures significantly reducing sales of whole-life products, insurers had little choice but to innovate in the 1980s to meet demand. They did so by redesigning whole-life into a hybrid product that included a traditional income protection component and a long-term investment component using market-based yields (and thus were interest return-sensitive). The first of these new complex products, universal life insurance, revolutionized the industry. Its popularity was rooted in its flexibility. By the mid-1980's, variable universal life insurance had emerged as a means of pairing the flexibility of traditional universal life insurance with the investment choices offered through variable life insurance. By the turn of the twentieth century, low interest rates spurred many insurers to begin marketing indexed universal life insurance. Indexed universal life insurance combines the potential for market-based growth with protection from negative market returns. Sales of this product have grown considerably over the last decade as those nearing retirement seek to balance risk with growth that will support retirement income needs.

Status: Life insurance and annuities are regulated by state insurance commissioners. The NAIC encourages states to adopt model laws and regulations designed to inform and protect insurance consumers. The NAIC Universal Life Insurance Model Regulation (#585) supplements existing regulations on life insurance policies in order to accommodate the development and issuance of universal life insurance plans.

The NAIC Life Insurance Illustration Issues (A) Working Group, created in 2016, continues to explore how the narrative summary required by Section 7B of the Life Insurance Illustrations Model Regulation (#582) and the policy summary required by Section 5A(2) of the Life Insurance Disclosure Model Regulation (#580) can be enhanced to promote consumer readability and understandability. This includes how they are designed, formatted and accessed by consumers. The Working Group is currently discussing draft proposals on how to amend Model #580 and Model #582 to incorporate a policy overview requirement that encourages (not mandates) the use of a template by providing a safe harbor if the template is used.

The mission of the Life Actuarial (A) Task Force is to identify, investigate and develop solutions to actuarial problems in the life insurance industry. After adoption of the Standard Valuation Law (#820) by 46 states representing 87.5% of industry premium prior to July 1, 2016, the Valuation became operative on January 1, 2017. The Task Force recently adopted revised Generally Recognized Expense Table (GRET) factors for 2020. Additionally, work is continuing on mortality tables for valuation and minimum nonforfeiture requirements for simplified issue forms of life insurance and a methodology for calculating the YRT Reinsurance reserve credit.


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