There is a lot of material in Full Disclosure. Here is a glossary
to help you understand what we ask for, and more importantly, why each topic is
important to understand policies.
12-b-1 Fees (VUL/VL, SVL)
Some
subaccounts may include annual 12-b-1 fees in their operating expense charge. They are
named for the 1980 Securities and Exchange regulation that created them and
represent annual charges levied against the total balance of a mutual fund's
assets to pay for promotional costs.
50/50 Term Blend (WL)
A policy illustration based on 50% of the face amount comprising
base coverage and 50% term insurance, usually as a rider. The purpose is to
provide a lower level premium outlay (guarantees and values are lessened).
Ability to Direct Charges from a Specified Account (VUL/VL,
SVL)
Newer generations of variable products may provide the ability to
direct charges from fixed, money market, or other specified subaccount(s) to
reduce volatility of policy returns.
PUA Premium Level Pour-In (WL, SWL)
A Paid-Up Additions rider is a mechanism to contribute additional
premiums to the policy to enhance accumulation values and death benefits. Each
addition (or dividend paid if left in the policy under a dividend to additions
option) is used to buy
a single premium life insurance “policy” for whatever amount it will purchase.
Age Calculation & Basis (All)
On the
issue date, the company may calculate the age to the last birth date, the nearest
birth date, or the next birth date.
Annual Income (VUL/VL, UL)
A popular use of life insurance in upper markets is funding a policy at high premium levels and then extracting policy values through surrenders and loans to fund retirement. Our tables assume a $10,000 annual premium is paid until the insured reaches age 64 (25 Premiums). Then a level income stream is paid at age 65 using surrenders to cost basis then policy loans (20 Payments, end of year 84). Upon retirement, the policy switches from Type B (increasing DB) to Type A (level DB). Policy loan interest is paid from policy values and residual cash value of $100,000 at regular policy maturity age is requested (some illustration systems cannot meet this requirement exactly). The death benefit specified is guideline minimum death benefit (the goal is values for income, not maximum DB) at the beginning of the contract period (that is not over-funding the contract into a Modified Endowment Contract (MEC).
Annual Premium (All)
First payment made on the issue date of the policy with equal
amounts paid annually on the anniversary date. Premium levels for UL and VUL
plans are benchmarked, and policies with high target premiums may be blended
with term insurance as necessary to meet these lower levels.
Annualized Rate of Return (VL/VUL, SVL)
The
yearly increase (or decrease) in the value of an investment including the
effects of compounding. Annualized returns are a bit more complicated than
average returns, which you can get by adding up the annual returns of a stock
or fund and dividing by the number of years. For a three-year annualized
return, for example, you must take the cube root of the cumulative return for a
three-year period to factor in compounding. Annualized return gives you a much better
idea of how a stock or fund performed and makes it easier to compare them over
the long term. Securities that have the same average return may have wildly
different annualized returns, especially if one security is volatile. For
example, it's possible for a stock or fund to have a respectable average return
but a negative annualized returned if gains in the first years are offset by
reductions later.
Automatic Actions at Maturity/End of Premium Paying Period (All)
A policy matures when it no longer requires external premium
payments (as opposed to internally paid premiums from policy values).
Traditionally, maturity is defined as the policy cash value equaling the face
amount at the regular maturity age (typically age 95, 99 or 100). Not as common,
are paid-up policies that have payments due for a limited number of years
ideally to coincide with the working years of the premium payer. Full
Disclosure covers this topic as companies may return the cash value of the
policy (whatever it may be) at maturity or continue the policy with no premiums
due past maturity. Also see Extended Maturity Options.
Automatic Portfolio Rebalancing (VL/VUL, SVL)
Adjusting an investor's asset allocation on a set time
period to account for changes in values. If automatic rebalancing didn’t do it,
the policyholder would have to sell one type of investment and buy another as
the values of each changed to keep the risk scenario the same. Rebalancing
adjusts the portfolio mix to reflect the new risk scenario and is not an attempt
to make frequent adjustments like market timing, and is usually done once a
year.
Availability with One Uninsurable Life (SL)
Policy premiums on survivorship life are low due to the decreased
probability of two insureds dying, as opposed to the higher probability of only
one. For this reason as well, many companies will accept one “uninsurable” life
if the other is in good health or no worse than a certain issue class or table
rating.
Base Policy Premium Structure (WL)
Most whole life policies have a guaranteed level premium that is
the same every year (if the policy is blended with term insurance to reduce the
premium, the guarantee is compromised). Some policies have what is called a
“modified” premium structure whereby the premium is lower in the early years
and increases later on. In many cases it is assumed that the dividends to be
paid from the policy will offset the difference.
Capital Gains in Dividend Scale (WL, SWL)
The treatment of capital gains and losses can vary. Some insurers
take these into account in fixing the dividend interest rate (a component of
the dividend scale a component of illustrated values) when they reflect actual
transactions. Others may transfer those transactions to a contingency reserve
where gains and losses are stabilized. Very good short term capital gains (or
losses theoretically) included in the dividend projections, may have the effect
of somewhat distorting the overall returns within the insurers portfolio, and
its eventual product pricing. See also Current Assumed Dividend Rate.
Most states require a dividend to cash option whereby a
check written for the amount of the annual dividend is returned to the
policyholder (as opposed to being reinvested under a paid-up additions or dividends
to deposit option).
“Catch-Up” Provision (All but WL)
A provision that allows a policyholder to “catch-up” if the
minimum premium necessary to secure a guarantee on the premium and death
benefit of flexible premium polices is missed. See also Secondary Guarantees
and Contingencies on Secondary Guarantees.
Changes at First Death (SWL)
At the death of the first insured (out of two in a single
survivorship whole life policy) changes may include an increase in the
guaranteed cash value and the cash value of previously purchased paid-up
additions, and a general increase in future dividends. Term insurance rates in
blended policies are usually unchanged. Many policies (all survivorship types)
make available first-to-die riders that offer a separate benefit at first
death, such as the payment of all future premiums left to the remaining
insured.
Commission Options (All)
If a policy’s first year premium is not as high as the target
premium, the company may allow the commission to “roll over” into the next year
until the full target premium is met. In this way the commission is a
percentage of the target premium, not only on the premium paid in the first
year. This category may also include other unique approaches to compensation.
Contingencies on Secondary Guarantees (All but WL)
Long-term guarantees of the premium and death benefit of flexible
premium policies are increasingly popular; however maintaining secondary
guarantees requires a minimum premium to be paid. Some companies rescind the
guarantee if the minimum premium is not made and others offer a “catch-up”
provision if the amount is paid. See also Secondary Guarantees and “Catch-Up”
Provision.
Current Accumulation Value (All)
Total of
all premiums paid and interest credited to the account before deductions for
any applicable unpaid loans or surrender charges.
Current Assumed Dividend Interest Crediting Rate (WL)
Along with mortality and expense, the dividend interest rate is
one of the components used in determining the projected dividend scale. By
itself, the rate is rather meaningless without knowing the pricing levels of
the other two components. A current dividend rate could be artificially high if
the product has high internal (meaning hidden as they are in WL “bundled”
policies) mortality and expense charges. Looking at the rate itself is rather
misleading, but we include it as it may be used in company marketing materials.
Some companies will not divulge it for the above reasons, which is fine.
Current Cash Value (All but WL)
Accumulation
value minus any surrender charges (plus termination dividend if applicable – WL
only).
Current Cost of Insurance (COI) (All)
The Cost of Insurance contains the mortality, perhaps other
benefit charges, and small expense component. Usually expressed a per-month
per-thousand charge factor, we compile them as the actual dollar charge for the
whole year for ease of comparison. To calculate the annual charge in
“unbundled” UL and VUL policies where the rate may be provided, the formula is:
([DB-Accumulation Value]/1000) X COI Factor.
COI used to be a fairly straightforward component of life
insurance, but now varies widely based on the policy’s design and the way the
company wants to position it in the marketplace. A low charge does not
necessarily make for a good product (or visa versa) and they must be considered
along with other expense and surrender charges, as well as the
interest-crediting rate (if applicable). Variations are such that some
companies refuse to reveal them, even in policy designs (UL, VUL) where costs
were originally meant to be divulged.
The rate credited to dividends left on deposit with the insurer (as opposed to reinvesting them back into the policy via Paid-Up Additions).
Current Expenses/Expense Charges (All but WL)
In variable and universal life policies, all costs are
individually deducted and accounted for within the policies. These expense
charges are fixed amounts or percentages deducted from gross premiums paid and
cash value, as specified in the policy. These are policy expenses as opposed to
subaccount (VL/VUL, SVL) charges, such as advisory fees. A tricky variable life
charge is Mortality & Expense (M&E), which can be deducted at either
the policy level, or at the subaccount level. Policies have better subaccount
annualized returns if the charged from the policy vs. the subaccount(s).
Current Increasing Death Benefit (UL, VL/VUL, SL)
In flexible premium policies there are two death benefit options:
Type A, a level death benefit option, and Type B, an increasing death benefit.
Under Type B the death benefit fluctuates with the cash value of the
policy. If the cash value increases,
the death benefit is the original policy amount plus the amount of the cash
value increase. Of course, the premium level is higher (or the cash values
lower) for an increasing death benefit policy vs. one with a level death
benefit. Policy death benefit options can be changed from one to the other at
any time.
Current Interest Crediting Rate (UL, SUL)
Developed in 1979, universal life became popular in the high
interest rate environment of the 1980s. The high current crediting rate, tied
to New Money interest crediting method (See also Current Rate Crediting Basis)
led to an advantage over traditional products. Originally, the crediting rate
was derived from investments held in the insurer’s general account and are set
by the company based on its experience or tied to an external (usually a short
term bond) index.
Of course, the credited interest rate is only one pricing
component (in addition to expenses, mortality charges, surrender charges, etc.)
that are factored into the design and pricing of these ostensibly “transparent”
policy designs. Of all the factors the crediting rate is the most obvious and
is the one consumers can relate to most. Now the rate is still tied to the
company’s investment experience but the relationship is looser and some
companies are loathe to lower the crediting rate if expenses within the policy
can be raised to compensate. This is neither a good thing nor bad thing, but it
is one of the reasons that we collect data on all of the elements of the policy
and something you should be aware of.
Current Level Death Benefit (UL, VL/VUL, SL)
In flexible premium policies there are two death benefit options:
Type A, a level death benefit option, and Type B, an increasing death benefit.
In a level death benefit Type A option as the cash value increases the net
amount at risk born by the company decreases. Even though the death benefit is
level, due to tax law the death benefit must be higher than the cash value of
the policy by a certain amount known as the death benefit “corridor”. This
corridor becomes an issue late in the policy’s life as the cash value
approaches the death benefit, or when the policy is heavily funded. Policy
death benefit options can be changed from one to the other at any time. See
also “Modified Endowment Contracts”.
Current Loan Rate (All)
Policy loan rates and methods vary between traditional and flexible
premium policies somewhat. In UL policies, for example the company charges a
rate and then credits back an equal or lower rate to the policyholder on the
amounts borrowed. Rates can be either fixed interest may be charged in advance
or arrears, which can greatly determine the total amount of interest paid on
the loan. We ask not only what the current loan rate is but what the maximum
rate is that can charged and what the contractual minimum amount credited to
loaned valued will be. Variable loan rates are increasingly common and may be
linked to an outside index which limits the ability of the policyholder to work
the “spread” between the policy loan rate and what loan withdrawals can be
invested at generally. See also Direct Recognition.
Current Rate/Dividend Crediting Basis (All)
When a premium is received by the company for a policy (or a
“fixed” portion thereof), it immediately invests the non-expense portion in its
general account. Under a New Money crediting basis that money is added to
others received during a limited time period. That “bucket” of money is
comprised of the newest investment, hence the name. In a time of increasing
interest rates, the newest investments in the general account would then
provide the highest crediting rates. Conversely the same is true in a
decreasing interest rate environment, which has led to stabilization in UL
market share. Under the Portfolio method all policies of the same series, new
and old, receive a crediting rate based on all of the investments (the whole portfolio).
Hybrids of the two types are known as “modified” or “blended” crediting
methods.
Direct Recognition (WL, SWL)
In the mid 1980’s many insurers began to tie their dividend
interest rate to the policy loan rate or the current dividend interest rate.
When credited rates of regular investments, such as money market accounts or
certificates of deposit, rose greatly policyholders could borrow from their WL
policies at lower loan rates. The effect was they would enjoy the spread while
the company was incurring the opportunity cost of the lower loan rate. By tying
loan activity to the policy they could thus reduce the dividends paid, or raise
the variable loan rate.
Dividend Options (WL, SWL)
The different ways in which the insured under a
participating policy may elect to receive policyholder surplus: in cash; as a
reduction of premium; as additional paid-up insurance (see Paid-Up Additions);
left on deposit at interest; or as additional term insurance. Some policies may
have other specific options. The vast majority of policyholders elect Paid-Up
Additions as an option allowing for faster accumulation of value and increased
death benefits.
Dividend Rate Calculation (gross/net) (WL, SWL)
The current dividend interest crediting rate can either be reported
as net of taxes, investment expenses and other deductions, or reported before
any deductions. See also Current Assumed Dividend Interest Rate.
Dividend Scale (WL, SWL)
Projected annual dividends based upon current and expected
mortality, expense and interest experience. Full Disclosure is the industry’s
only source for actual historical performance of dividends (projected vs.
actual). See also Current Assumed Dividend Interest Rate.
Dollar-Cost Averaging (VL/VUL, SVL)
An investment strategy where an investment of a constant
amount is made in the same security or subaccount at regular time intervals,
regardless of the market prices or conditions. The investor is able to heighten
returns by purchasing more shares of the subaccount when prices are reduced,
which of course all rise in value when experience improves.
Effective Date of Current Dividend Scale (WL, SWL)
The last date the dividend scale was raised, lowered or continued
unchanged. Most companies adjust them on January 1, but some make changes in
February or July.
Estate Protection Rider (SL)
Survivorship life policies are usually held in irrevocable trust
separate from the insured’s estate. Should the insured’s die early and the
death benefit be included in the estate, it would be taxed. An extra death
benefit (the estate protection rider) is payable in case this should this
happen. The period is usually for the first four years and the benefit may be
automatically included or be an extra-charge rider. It is designed as cheap
insurance against a financial disaster.
Exchange of Insured (SL)
In a survivorship life policy the ability to exchange insureds is
useful in business cases or others where a current situation may change.
Companies may allow a change at divorce or change or repeal in the Federal
Estate Tax provisions of the Internal Revenue Code. Others will allow a general
exchange with proof of insurance and a small fee. In all cases the new insured
will be classified at their attained age. See also Policy Split.
Extended Maturity Options (All)
Extended maturity is the option to continue ownership of the
policy by rider (free or charged) or policy design past its regular maturity
date (typically age 95, 99 or 100). The most common approach is the
continuation of face amount and cash value with the cessation of policy level
charges. Also see Automatic Actions at Maturity.
First-Year Premium Collected for this Policy Only (All)
New policy premiums (as opposed to renewals) for this policy only. Amount includes lump sums and is not annualized. There are no standards in the industry for reporting premiums, and companies may not have what we ask for so look in the footnotes or entry for details. We include this to gauge the market penetration of the policy. Check the availability date in the specifications section to see how long it has been on the market.
Fixed Accounts (VL/VUL, VSL)
A fixed account provides a current crediting rate and many
companies offer a guaranteed minimum rate of return. Assets in a fixed account
are held in the insurer’s general account for investment and fluctuate with the
investment experience in this account (which is comprised mostly of bonds).
Some policies may also feature money market, zero-coupon or other options as
“fixed” investments.
Fund Operating Expenses (VL/VUL, VSL)
A basis point (25 basis points = .25%) charge deducted from subaccount values to cover the day-to-day expenses of operating the subaccount/fund.
Guar Max Loan Rate/Guar Minimum Credited to Loaned Values (All)
The maximum loan interest rate chargeable (if the policy has one),
and the guaranteed minimum rate credited to values that are loaned from the
policy
Guaranteed Cash Value (All)
An illustrated value assuming the highest expense charges, costs
of insurance, loads and fees, and (if applicable) the lowest guaranteed
credited interest rate. In short the worst-case scenario for the policyholder.
For WL policies it is assumed there are no non-guaranteed dividends.
Guaranteed Crediting Rate (UL, SUL)
The lowest contractual crediting rate (as opposed to a fluctuating
“current” crediting rate) the policyholder will receive on accumulated policy
values.
Illustration Enhancements (UL, VL/VUL, SL)
Guaranteed or non-guaranteed interest rate bonuses designed to
enhance long-term illustration performance and to encourage persistency. For a
time cost of insurance refunds were also popular, but most enhancements these
days take the form of an interest rate bonus in a future policy year (example:
.25% in year 21and thereafter). There are still interesting variations in
enhancements.
Initial Crediting Rate on In-Force & New Business (UL, WL, SL)
This is another way of asking whether companies use a New Money approach where policyholders may receive different rates. Portfolio crediting means everyone in a series, both new and older policyholders, receive the same rate. This category in the WL database is listed as: Inforce/New Business Dividend Rate. See also Current Rate/Dividend Crediting Basis.
Interest-Adjusted Payment Index
(WL)
The interest-adjusted payment method is used to measure policy
efficiency (in generating accumulation values) between policies with dissimilar
premiums. The lower the index the more efficient it is in generating dividends
(and values).We use the IRR method when benchmarking policies with flexible
premiums that can be run at the same premium level; the WL history section is
the only time we employ the IA method, and that is with dividends to cash only.
It is a complicated method of accumulating the dividends and premiums at 5%
interest and then subtracting the dividends and cash value. The policy is not
assumed to be surrendered at the end of the time period in question.
Interest-Adjusted Surrender Cost Index (WL)
The interest-adjusted surrender cost index is used to measure
policy efficiency (in generating accumulation values) between policies with
dissimilar premiums. We use the IRR method when benchmarking policies with
flexible premiums that can be run at the same premium level; the WL history
section is the only time we employ the IA method, and that is with dividends to
cash only. It is a complicated method of accumulating the dividends and
premiums at 5% interest and then subtracting the dividends and cash value. The
policy is then assumed to be surrendered at the end of the time period in
question and any termination dividend is also subtracted. The lower the index
the more efficient it is in generating dividends (and values).
Introduction Date/Last Revision (All)
The original introduction date of the policy and the last date of
any major revisions to its design or pricing.
IRR - Internal Rate of Return (All)
IRR is an
easy to understand method of determining the return on an investment. While not
applicable as a measure of “investment performance” in life insurance, it is
superb in gauging the efficiency in which a policy generates cash vales, death
benefits or both. It is the rate of discount at which the present value of the
future cash flows equals the initial investment.
Investment Advisory Fee (VUL/VL, SVL)
A fee
charged by the financial advisor to a subaccount/fund based and passed to the policy
owner in the form of a basis point charge deducted from the sub account’s
value.
Issue Ages/Ranges (All)
Minimum and maximum issue ages for the policy. Age ranges are for
survivorship products that limit the age differences of the insureds under the
policy (example 30 years). Other products have no range, theoretically allowing
for a grandparent/grandchild combination.
Issue Amounts & Policy Size Bands (All)
Minimum and maximum issue amounts and pricing bands. Policies can
be banded at $100,000, $250,000 and $1,000,000. The higher the face amount the
cheaper the per $1,000 amount of coverage. A policy banded and issued at
$500,000, for example, would be cheaper than a policy with a death benefit of
$480,000 because of the discount.
Issue Classes (All)
A group of insureds with the same general characteristics
and risk exposure classified together for rating purposes. Some companies split
classes into many categories of smokers and nonsmokers, while others take a
“big tent” approach with a few broadly applied classes.
Limitations on Transfers
(VL/VUL, SVL)
To limit administrative burdens, and to discourage “market timing”
activities which rely on numerous transfers, some insurers limit transfers
between subaccounts to a reasonable amount before imposing per-transfer
charges. More stringent limit are set on transfers from the fixed account as
those funds are managed within the insurers general investment account and
typically utilize bonds of set maturities. See also Fixed Account.
Lump Sum Contribution (WL,
SWL)
The maximum amount that can be contributed to a policy above the
regular annual premium at one time. This amount may cause the policy to be
over-funded which may result in negative tax consequences. See also Modified
Endowment Contract.
Maximum Company Face Amount Retention Limit (All)
The maximum amount of coverage a company will retain on one
life at its own risk before reinsuring the rest with another company or
reinsurance company.
Maximum Number of Investment Options (VL/VUL, SUL)
The maximum number of fixed or variable subaccounts within a
variable life policy the insured can participate in. For example, if a policy
offers 38 subaccounts, the maximum the insured may be able to participate in
(in order for the company to maintain control of its expenses) may be 20. There
may be no limitation on the number of accounts.
Maximum Period to which Face Amount/DB can be guaranteed? (UL, VL/VUL)
By rider, or by
meeting a specified premium level, the maximum period to which the death
benefit and the premium to fund it, are guaranteed. See also Secondary
Guarantees, Contingencies on Secondary Guarantees and “Catch Up” Provision.
Message From the Company
(All)
We champion the fact
that policies are designed to accomplish certain objectives and a comprehensive
analysis is the only reasonable way to draw comparisons. A policy may shine at
issue ages, face amounts, and issue classes we do not cover, for example. To
that end, we have included the strengths, as stated by each company. We don’t
over-edit this section, but rather try to let the companies tell you in their
own words, what each policy was designed to do best. See also Product’s Objectives.
Method Used to Calculate Average Fund Expense for
Illustrations (VL/VUL, SVL)
Variable life insurance illustrations are calculated using a
hypothetical (12% for example) return that then also “nets out” the average
administration and expense charges of the subaccounts available within the
policy. A straight numerical average is just that while a “weighted” average
consists of expenses weighted by the asset pool each subaccount represents.
Larger (especially indexed) funds have lower fees due to lower expense
management or economies of scale and help improve the average expense due to
their size. Some feel an unfair advantage is gained when funds are weighted,
but others feel it more accurately represents what the average policyholder
would experience.
Minimum Annual Premium to Endow
(All but WL)
With flexible-premium policies, the smallest amount of
premium the insurance company requires to endow the policy at the regular
maturity age on a current basis. Endowment means that the cash value of the
policy equals the death benefit. A current basis is assumed projected expenses
and cost of insurance and today’s current credited interest rate (or in the
case of variable policies, a hypothetical projected return). In certain cases
the premium to endow may not be a level, or the policy may not have a maturity
age. Typically companies will use Age 100 if there is a later (or no) maturity
age defined in the contract.
Minimum Annual Premium to Carry
(All but WL)
With flexible-premium policies, the smallest amount of
premium the insurance company requires to maintain the initial death benefit
through the life of the contract on a current basis. We ask our companies to
assume $1 of cash value at maturity. A current basis is assumed projected
expenses and cost of insurance and today’s current credited interest rate (or
in the case of variable policies, a hypothetical projected return). In certain
cases the premium to endow may not be a level, or the policy may not have a
maturity age.
Modified Endowment Contract (MEC)
(All)
If a policy fails to satisfy the “seven pay test” it no longer
meets the definition of life insurance and the inside build-up of the policy
becomes taxable as income to the policyholder. Basically, if there is too much
put in the IRS views the contract as other than life insurance. The test is
that if the accumulated amount paid into the contract in the first seven years
exceeds the amount that would have been paid under a paid-up seven pay life
policy, it is a MEC.
Mortality & Expense (M&E) Charges (VL/VUL, SVL)
A charge levied due to the expenses assumed by the company when a
policyholder dies. Critics charge that little such risk exists. An important
distinction between M&E charges is where they are levied. Charges pulled at
the subaccount level will be reflected in a policy’s illustrated values. Those
accounted for at the policy level may provide an illustration advantage as
these charges are not “netted out” of the illustration as subaccount charges
are. See also Source of M&E Deductions.
Mortality Charge Structure
(UL, VL/VUL)
Some companies employ a “select & ultimate” mortality structure where new insureds receive a lower charge than others the same age. The theory is that a new insured reflects a superior risk because he was just tested, qualified for, and was issued life insurance (meaning someone healthier than insureds the same age in the general population on which the regular charges are based). The ultimate table reflects the regular charges beyond the select years. The select period usually ranges from 15 to 20 years from the policy issue date.
Non-Medical Limits (All
but SL)
Refers to
underwriting limits, where initial death benefit amount will not require a
medical or “para-med” (blood/urine/interview) exam.
Number of Free Transfers Between Subaccounts (VL/VUL, SVL)
To limit administrative burdens, and to discourage “market timing”
activities that rely on numerous transfers, some insurers limit transfers
between subaccounts to a reasonable amount before imposing per-transfer
charges. Transfers can be made tax free and typically allowed 12 - 20
times per year.
Number of Subaccounts
(VL/VUL, SVL)
The number of subaccounts available within a policy. This number
does not include “fixed” accounts that are managed by the insurance company and
held in its general investment account. See also Subaccounts.
Objective (VL/VUL, SVL)
Defined as the investment objective of the subaccount or the composition of investments within it. The objective could be Growth or Income, or what its composition is, such as Bond or Real Estate. What it is designed to do or more directly what it is.
Paid-Up Additions (WL,
SWL)
Each dividend paid is left in the policy under the Paid-Up
Additions dividend option. It is used to buy a single premium life insurance “policy” for whatever
amount it will purchase to enhance accumulation
values and death benefits.
Partial Surrenders (UL,
VL/VUL)
A partial surrender is the policy owner’s right to remove a
portion of the accumulated cash value. Partial withdrawals may incur a
surrender charge (usually a pro-rata amount of the full surrender charge) and a
processing fee. They are usually not available until after the first policy
year and are subject to minimum and maximum amounts.
Policy Fee (All)
A flat annual (or monthly) dollar amount fee (example: $25
annually) to cover the costs of policy administration such premium
collection and tax payments.
Policy Split/Split into Unequal Parts (SL)
Companies may offer a provision whereby a survivorship life policy
may be split into policies on each individual life. Usually this is allowed on
an attained age basis if the Unlimited Marital Tax Deduction is appealed, at
divorce, or some other event nullifying the need for the policy. This is a
particularly useful feature in business applications (“key men” for example).
Product Distribution (All)
In an age of diverse distribution channels, companies may offer
their products through brokerage, agency, PPGA, wire house, or other means. We
ask which channels are employed and the percentage employed of each for the
policy in question.
Product's Objective(s)
(All)
Products are designed to accomplish certain objectives. Here we break these objectives into categories to ease comparisons of contracts that may in fact not be meant to do the same thing. Objectives may include high early cash values, favorable underwriting, low premiums to endow, underwriting flexibility and a host of others.
Reserve Basis (All)
The mortality table and the assumed interest rate used in
the computation of rates. All companies were required to change to the 1980 CSO
table by 1989. Additional changes may be forthcoming as actuaries look to
adjust the 1980 tables to reflect longer life spans.
Riders (All)
Supplemental agreement attached to and made a part of the policy,
whether the policy's conditions are expanded and additional coverage added,
coverage or condition is waived, or policy is in some other way customized to
the needs of the insured.
Secondary Guarantees of Premium & Death Benefit (VL/VUL, UL, SL)
Flexible premium policies derive values from current rates
credited to the policy based on the investment experience of the insurer, or
the performance of variable subaccounts. When current rates drop or subaccount
performance declines enough, the insured may have to pay additional premiums or
the death benefit will decrease or the policy will lapse. A secondary guarantee
is designed to prevent either from happening. As you can imagine, this is not
free and companies offer it via a paid rider, or by setting higher minimum
premium levels at the policy’s outset. Some polices have an automatic limited
guarantee (example: five years) to limit risk in the early policy years. Often
companies require that the minimum premium necessary to obtain the secondary
guarantee be paid consistently or it will withdraw the guarantee (See Catch-Up
Provision).
Source of M & E Deductions
(VL/VUL, SVL)
Mortality & Expense charges are levied due to the expenses
assumed by the company when a policyholder dies. Charges pulled at the
subaccount level will be reflected in a policy’s illustrated values. Those
accounted for at the policy level may provide an illustration advantage as
these charges are not “netted out” of the illustration as subaccount charges
are. See Mortality & Expense Charges.
Standard with One Life Rated
(SL)
Because of the lower mortality risk of the two insured lives in a
survivorship life contract, companies may issue the policy as standard, even
though one of the lives is ratable under normal underwriting guidelines.
State Availability (All)
The states the policy is approved for sale in on the effective
date of each of our surveys.
Subaccount Manager
(VL/VUL, SVL)
The primary firm engaged in managing the fund that includes a
subaccount in a variable life policy. The majority of subaccounts are managed
by firms outside of the company selling the policy (example: Fidelity
Management & Research). The total assets of each subaccount are pooled with
subaccounts from other companies and products to take advantage of larger
economies of scale and therefore lower overall expenses.
Subaccount (VL/VUL, SVL)
One of the separate investment accounts within a variable
life policy or variable annuity. Each subaccount has its own investment
portfolio and objectives, and can be managed by a company’s subsidiary
investment company, or increasingly more commonly, an outside investment firm
(example: Fidelity). Subaccounts are known as “separate accounts” in that
assets are not co-mingled with the insurer’s “general” account.
Substandard Risk (All)
A risk that is considered by the underwriter as not meeting normal
underwriting standards (within their usual issue classes) because of health or
vocational considerations. Many insurers avoid such risks while some specialize
in them. Insureds may be rated to a substandard table (example: Table D), or
charged a “flat extra” dollar amount.
Surrender Charges (All
except WL)
Charge
deducted had the policy been surrendered, or lapsed on the previous business
day. On universal and variable life policies charges are usually calculated by
formula based on age, sex and issue class (a straight line percentage charge,
like those found in fixed annuities, was formerly more common). To gauge the net
charge deduct the illustrated cash vale (net of surrender charge) from the
policy’s accumulation value. Participating whole life policies have no
surrender charge. See also Partial Surrenders.
Target Premium (VUL/VL,
UL, SL)
Initially
developed to overcome the concern of companies in under-funding of flexible
premium contracts (by setting an ideal “target”) it is also a basis of
compensation as the commission is a percentage of the target premium.
Theoretically, the target premium is adjusted when crediting rates rise or fall
changing the funding needs of the policy. See also Commission Options.
Ten-Pay Premium (All)
Illustrating a premium stream on a current basis (crediting rate,
COI and expenses) with ten annual premiums as opposed to the life of the
contract. After higher out-of-pocket premiums are paid for ten years, annual
premiums due are deducted from policy values. Should current assumptions
worsen, additional premiums may be necessary to fund flexible premium policies
that do not have secondary guarantee provisions on the premium/death benefit.
Term Blend (All)
The ability to blend base policy coverage with term insurance (by
rider) to lower premium outlay. The more a policy is blended with term the
lower the cash value and death benefit growth will be relative to a like policy
that is unblended.
Term Convertibility (All)
The
ability to convert an additional term rider to the permanent form of insurance
without a medical examination. Conversion usually must be made within a
specified period, and the new premium is based on the attained age of the
insured at the time of conversion.
Term Premium Guarantees
(All)
Initial period the premium of any term insurance rider is
guaranteed (example: 1 year, after which the insurer may raise the term
insurance portion of the policy premium.)
Termination Dividend (WL)
Additional
dividend amount paid upon either the death of the insured or the surrender of
the policy (amount is not guaranteed and may change).
Total Cash Value (All
except WL)
Accumulation
value minus any surrender charges (plus termination dividend if applicable – WL
only). On an in-force ledger for an existing policyholder it would also be net
of policy loans.
The
amount that would have been paid to the insured (including rider amounts)
reduced by any outstanding loan balance or charges due up to the date of death.
Full Disclosure universal life illustrated values and death benefits are based
on a level death benefit assumption. However, a line is included for each
illustration showing what the death benefits would illustrate under an
increasing death benefit option (current values would be reduced). The purpose
is to ascertain the policy’s design (death benefits vs. cash values).
Transaction and Other Fees
(VL/VU, SVL)
Withdrawal, transfer, or other fees that may be classified outside
the usual expenses that we request information on.
Treatment of Substandard Risk
(All)
To adjust risk exposure to substandard insured’s, companies may
use Table Ratings or flat extra premium amounts. Table ratings are special
mortality tables developed for each rated class that reflects the mortality
experience within each class (each condition is lumped into each class with
other conditions that may exhibit similar risk of death). Flat extra premiums
are used when the extra mortality for a given condition, measured in deaths per
thousand, is expected to be constant on a short or long term basis (this method
works particularly well when applying risks of avocation, such as flying, are a
known constant).
Numerous
sources were used for the compilation of this glossary.