Universal Life Model Regulation (MDL-585)

Expenses Allowance
R-Ratio
Charges

https://www.naic.org/store/free/MDL-585.pdf

Universal Life Model Regulations – Citations Note

Chronological Summary of Actions (all references are to the Proceedings of the NAIC).
1984 Proc. I 6, 31, 376, 514, 515-526 (adopted).
1988 Proc. I 9, 19-20, 494, 599-600, 627 (adopted change to footnote 3).
1989 Proc. II 13, 23, 414-415, 428-429, 431-442 (amended to include consumer disclosure requirement).
1990 Proc. I 6, 27, 438-439, 450-451, 453-463 (amended).
2000 Proc. 3rd Quarter 13, 14, 88, 116, 119-135 (amended and reprinted)
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1988-1 NAIC Proc. 479

Sample GMP Nonforfeiture Test Calculation

This section gives 22 examples of GMP nonforfeiture test calculations. The front side of each example gives the product specifications, the nonforfeiture basis, and calculated guaranteed maturity cash values compared with SNFL minimum values. The back side of each example shows the month-by-month calculations for one year of the universal life cash values.

American Academy of Actuaries Universal Life Task Force Preliminary Report Concerning Valuation and Nonforfeiture Provisions of Universal Life Insurance Model Regulation, ATTACHMENT TWO-B
1998-1, NAIC Proceedings

1984, NAIC Update, Society of Actuaries

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Drafting Note: It is the position of the drafters of this regulation that universal life insurance is simply another competing type of life insurance which should be treated, to the extent possible, in the same regulatory manner as other life insurance products. 

This regulation is designed to address those areas where universal life insurance does not “fit” into the existing regulatory framework. This regulation does not supersede existing requirements relating to filing, solicitation, advertising, etc., but is supplementary to them.

D. “Flexible premium universal life insurance policy” means a universal life insurance policy which permits the policyowner to vary, independently of each other, the amount or timing of one or more premium payments or the amount of insurance.

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G. “Policy value” means the amount to which separately identified interest credits and mortality, expense, or other charges are made under a universal life insurance policy.”

Drafting Note:  Care should be taken not to place undue emphasis on the policy or “account” value. Very often the policy value is not directly available to the policyowner.
Instead, the policy value is an intermediate step used to determine benefits actually available to the policyowner such as cash surrender values, net cash
surrender values, death benefits, or maturity values. The benefits actually provided the policyowner should be considered in establishing valuation and
nonforfeiture standards. H. “Universal life insurance policy” means a life insurance policy where separately identified interest credits
(other than in connection with dividend accumulations, premium deposit funds, or other supplementary
accounts) and mortality and expense charges are made to the policy.  A universal life insurance policy may
provide for other credits and charges, such as charges for the cost of benefits provided by rider. Drafting Note: Unlike the unitary nature of traditional whole life insurance, a distinguishing feature of universal life insurance is the existence of an indeterminate policy
value from which specified periodic charges are deducted and to which specified periodic interest is credited at a rate not determined at issue. This
indeterminate policy value feature with separately identified charges and credits may or may not have a premium pattern predetermined by the insurer at
issue. Valuation and nonforfeiture treatment of these products varies depending upon the nature of the premium pattern. To distinguish these treatments, a
definitional distinction has been made between “flexible” and “fixed” premium policy forms.

 

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The guaranteed maturity premium for flexible premium universal life insurance policies shall be that level
gross premium, paid at issue and periodically thereafter over the period during which premiums are
allowed to be paid, which will mature the policy on the latest maturity date, if any, permitted under the
policy (otherwise at the highest age in the valuation mortality table), for an amount which is in accordance
with the policy structure.1 The guaranteed maturity premium is calculated at issue based on all policy
guarantees at issue (excluding guarantees linked to an external referent).  <R-Ratio> The letter “r” is equal to one, unless the policy is a flexible premium policy and the policy value is less than
the guaranteed maturity fund, in which case “r” is the ratio of the policy value to the guaranteed maturity
fund. The guaranteed maturity fund at any duration is that amount which, together with future guaranteed
maturity premiums, will mature the policy based on all policy guarantees at issue.

The benefit charges shall include the charges made for mortality and any charges made for riders or supplementary benefits for which premiums are not paid separately.

The administrative expense charges shall include charges per premium payment, charges per dollar of premium paid, periodic charges per thousand dollars of insurance, periodic per policy charges, and any other charges permitted by the policy to be imposed without regard to the policyowner’s request for services.

The initial acquisition expense charges shall be the excess of the expense charges, other than service charges, actually made in the first policy year over the averaged administrative expense charges for that
year. Additional acquisition expense charges shall be the excess of the expense charges, other than service charges, actually made in an insurance-increase year over the averaged administrative expense charges for that year. An insurance-increase year shall be the year beginning on the date of increase in the amount of insurance by policyowner request (or by the terms of the policy).

Service charges shall include charges permitted by the policy to be imposed as the result of a policyowner’s request for a service by the insurer (such as the furnishing of future benefit illustrations) or of special transactions.

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Drafting Note: The drafters chose a whole life initial expense allowance for several reasons. Although highly flexible, universal life insurance is generally
considered a permanent life insurance plan. Most companies encourage a premium level which will provide lifetime insurance protection. Every universal
life insurance policy of which the drafters are aware has a “net level premium” that could be computed which would guarantee permanent protection. As a
result, it is expected that most universal life insurance policies will be sold as permanent plans. The alternative of basing the initial expense allowance on a policyowner’s “planned premium” was considered but rejected as artificial and subject to
substantial manipulation by agents and/or insurers.

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Section 7. Mandatory Policy Provisions
A. Periodic Disclosure to Policyowner
The policy shall provide that the policyowner will be sent, without charge, at least annually, a report which will serve to keep such policyowner advised as to the status of the policy.  Drafting Note: Fixed premium universal life insurance policies may be required to contain a table of cash surrender or nonforfeiture values, by law. Such a
table of values is of little use for a flexible premium policy, since the premiums cannot be determined, and therefore, such table should not be required to be
included in the policy. Periodic disclosure to the policyowner is designed to fulfill the purpose of such a table of values, which, because of the nature of
universal life insurance, cannot be determined at issue for a flexible premium policy.
B. Current Illustrations
The annual report shall provide notice that the policyholder may request an illustration of current and future
benefits and values.
C. Policy Guarantees
The policy shall provide guarantees of minimum interest credits and maximum mortality and expense
charges. All values and data shown in the policy shall be based on guarantees. No figures based on
nonguarantees shall be included in the policy.

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F. Grace Period and Lapse
The policy shall provide for written notice to be sent to the policyowner’s last known address at least thirty (30) days prior to termination of coverage.
A flexible premium policy shall provide for a grace period of at least thirty (30) days (or as required by state statute) after lapse. Unless otherwise defined in the policy, lapse shall occur on that date on which the net cash surrender value first equals zero. H. Maturity Date
If a policy provides for a “maturity date,” “end date,” or similar date, then the policy shall also contain a
statement, in close proximity to that date, that it is possible that coverage may not continue to the maturity
date even if scheduled premiums are paid in a timely manner, if such is the case.
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Section 9. Periodic Disclosure to Policyowner
(8) For flexible premium policies:
If, assuming guaranteed interest, mortality and expense loads, the policy’s net cash surrender value
will not maintain insurance in force until the end of the next reporting period unless further
premium payments are made, a notice to this effect shall be included in the report. Section 10. Interest-Indexed Universal Life Insurance Policies
The following information shall be submitted in connection with any filing of interest-indexed universal
life insurance policies (“interest-indexed policies”). All such information received shall be treated
confidentially to the extent permitted by law.

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Drafting Note: Interest-indexed products present unique aspects….  In requiring the filing and evaluation of the above items, together
with an annual actuarial opinion, the drafters have attempted to preserve the basic principle of the valuation laws, which is to maintain the ability of the
insurer to meet its future contractual obligations.
It is assumed that the evaluation of the information provided in this Section together with the experience of insurers in writing indexed forms will lead to a
more scientific approach to valuation in the future.
The drafters believe that by focusing attention on cash flows and the quality and quantity of assets supporting indexed policy liabilities, most of the risks
associated with indexed products can be addressed by insurers and regulators in a manner which will provide adequate protection to the public while
permitting experimentation and diversity in minimizing the uncertainty associated with the valuation of these products.