In this Section:

It All Starts With Net Amount At Risk

VUL and IUL policies with volatile elements drive the actual, ongoing

policy crediting rate. This naturally will produce fluctuations in net
amount at risk: the amount of actual insurance that, when added to
the policy month’s account value (VUL) or the policy year’s account
value (1-year point-to-point IUL), adds up to the level death benefit
specified in the policy. When the schedule of cost of insurance (COI)
charges are low at younger ages, minor fluctuations in account value
probably will not make much of a difference to the long-term ability
of the policy to sustain itself through volatility. But if a planned
premium is calculated for the purpose of driving the “price” as low
as possible, the policy will not have much room to sustain a big deviation
from the theoretical account value “curve” that runs from the
lower left-hand corner to the upper right-hand corner of the conceptual
illustration graph.



In this graphic example of an IUL with a minimum 0 percent and
maximum 10 percent credited return, the hypothetical and randomly
generated crediting rates drive the account value almost exactly
along the so-called perfect curve. This is until age 81, when two
years of (implied) negative returns in the index cause the account
value to drop when only 0 percent is credited to the account value,
while at the same time more money has to be taken from the account
value to pay for more “net amount at risk” to compensate for the
lower-than-expected account value. At this age, the relatively high
monthly COI charges force the policy’s account value into a negative
spiral from which the policy cannot recover, and (in this example) the
account value dissipates by age 97, causing the policy to lapse. This
will concern the 70 percent of the population who believes they will
outlive their peer group’s average life expectancy!


Richard M. Weber, CLU, MBA, AEP (Distinguished), is past president of the Society of Financial Professionals. A 45-year veteran of the life insurance industry, he is a consultant to insurers and their agents on the topic of effective and ethical selling. Contact him at [email protected] [email protected].

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