Policy Mechanics / Cash flow

Its <Universal Life> fundamental “mechanics” are indistinguishable from those underlying traditional life insurance products.
–Samuel H. Turner, President – The Life Insurance Company of Virginia
1982 – Journal of Insurance Medicine – 1p There are some real advantages that flow from the flexibility inherent
in the reserve and cash-value mechanics that Mr. Chapin has introduced
into the adjustable life policy. These advantages deserve some discussion
because many are not immediately apparent. –CHARLES E. ROHM

1978, TOWARD ADJUSTABLE INDIVIDUAL LIFE POLICIES, WALTER L. CHAPIN

In that case, there will remain at the end of the year the net premiums less the mortality charge, or cost of insurance, increased by the interest upon the premiums from the time they were invested.

1871- NAIC Proceedings

The premiums you pay (less expense charges) go into a policy account that earns interest, and charges for the insurance are deducted from the account. Here, insurance continues as long as there is enough money in the account to pay the insurance charges.

1983-1, NAIC Proc

Key Attributes of Generic Life Insurance Policies — Table 4-2

Duration of coverage – Universal Life – Depends on premiums paid

2015 – Life Insurance 15th Ed. – Black, Skipper, Black (Huebner Series) – page 111

Many insurance companies even have a way to get a consumer’s money without the consumer ever knowing about it.

Most policies have a clause that allows the company, without telling the policyholder, to dip into the savings component of their life insurance policy.
This can happen, for instance, when a consumer stops paying on a policy because he or she believes that the policy is paid up.

Then, without even telling the policyholder, the company can raid the savings to pay itself more premium. –Senator Metzenbaum (page 3)

1992 – GOV – Consumer Disclosure of Insurance – Page 3

The role of the policy value, or account value, with its monthly algorithm and mortality, interest and expense guarantees, is part of the cost structure of the product.

In a traditional product the inner workings are hidden.

With this product <Universal Life>, the mechanic is “unbundled” and open.

But events that are now observable may be misinterpreted.

–Douglas Doll <Actuary>

1988-2, NAIC Proceedings

First thing that I want to say is that there have been some references to Misleading Illustrations.

I’m certainly not aware of the Regulators have not found that Illustrations are misleading.

That seems to be just an allegation that is left hanging in the air, which is inaccurate. The Illustration is not misleading.

The policy is performing according to policy mechanics.
— Scott Harrison

2019/11/15 – IULWG, NAIC Proceedings – Conference Call <Bonk>

https://bbcontent.theamericancollege.edu/Course/BbC/01_HS/311/PDF/2011/HS311_TB08_11.pdf

As each premium is paid, it is added to the policyowner’s accumulation account. An expense charge and a mortality charge to cover the policy’s share of current death claims are deducted.

…some people view the UL fund mechanics as an opening of the dividend box… –PHILIP K. POLKINGHORN

1988 – UPDATE ON UNIVERSAL LIFE RESERVES AND NON-FORFEITURE VALUES – 36p, Society of Actuaries

¹³⁵ -The 1974 Society of Actuaries report stressed that adequate information disclosure must consist of both a method for comparing costs of competing policies and a method for disclosing the cash flow·elements and benefits of a particular life insurance contract as it relates to the individual purchaser.

The cash flows of a policy are defined by the Society for this purpose as “the actual transfer of funds between the policyholder and the insurance company in either direction, and includes premiums, dividends, cash values and death benefits.”
Actuaries Report, supra n. 33, at 6.

1978 – GOV – Life Insurance Marketing and Cost Disclosure – Moss

Let’s review the basic mechanics of Universal Life.

The first thing that has to occur is a premium payment.

A premium may be paid at any time and in any amount desired.

Whenever a premium is paid, loads are deducted from that premium.

The balance is added to a fund.

On a monthly basis, cost of insurance charges are deducted from the fund.

Expense charges may be deducted from the fund, especially in the early policy years, and interest is added to the fund on a monthly basis.

The cash value changes each month based on the net impact of the income and deduction transactions.

The policy does not lapse if a premium is not paid; rather, it lapses if the fund balance becomes too small to pay the next month’s cost of insurance. –BEN H. MITCHELL

1981 – Universal Life, Society of Actuaries

1986 AP UL VUL Unbundled comparisonofuniv1277darcy

If the universal/

variable life insurance premiums are not sufficient to cover the policy

expenses and mortality costs, the cash value is reduced to cover the

deficit.

“The policy does not lapse if a premium is not paid; rather, it lapses if the fund balance becomes too small to pay the next month’s cost of insurance.” –Ben H. Mitchell

1981 – Universal Life, Society of Actuaries

8. Flexible life: This policy permits the policyholder to vary the amount of his premiums, the frequency of his premiums, and the amount of his death benefit.

With this policy, the policyholder pays a premium.

From the premium, various expense charges are deducted.

The remainder is added to the cash value that accrues at interest.

Each month a mortality charge is deducted based on the net amount at risk, the attained age of the insured, and the mortality rate schedule.

— William T Tozer

1981, INDIVIDUAL LIFE INSURANCE COST DISCLOSURE ISSUES, Society of Actuaries