In contrast with traditional whole life and similar to UL, CAWL policy elements are “unbundled,” or separately reported, and the actual cash value accumulation is prospectively indeterminate. Features of universal life possessed by CAWL include:
- The insurer uses an accumulation account to track cash values. Each year the insurer adds premium less annual expense charges to the preceding year’s accumulated account balance. The insurer credits interest to the balance in the cash value accumulation account based on the company’s current rate. The policy promises to pay a rate not less than the contract guaranteed rate, which has historically varied from about 4 to 6 percent, but has been lower on more-recently issued policies because of the relatively low market interest rates over the last decade. Finally, the insurer deducts from the account mortality charges, which are based on the net amount at risk (face amount less cash value). The maximum mortality rate the company may charge is also specified in the contract. Because the interest rates that the insurer will credit and the mortality charges that it will debit to the cash accumulation account balance in future years are uncertain, neither the insurer nor the policyowner can know the future accumulation account balance with any certainty. Some CAWL policies have no explicit expense charges. Instead, the insurer may wrap expense charges into mortality charges or include them as an adjustment to the current rate that the insurer credits to cash values. Also, a few CAWL policies are truly interest-sensitive policies only. Similar to many traditional whole life policies, on these interest-only sensitive policies the insurer fixes and guarantees the mortality charges.
- Most CAWL policies have very low or no front-end loads and, instead, impose back-end surrender charges. Typically, the insurer adds the entire first-year premium, less the usual yearly expense charge, to the accumulation account. Therefore, most of the policyowner’s premium payment immediately begins to earn interest. The insurer levies the back-end charge when and if the policyowner lapses or surrenders the policy. The insurer usually specifies the surrender charge as a percentage of the premium or cash accumulation account. The surrender charge rate typically declines each year until it reaches zero in nine to fifteen years.
- Some insurers offer CAWL policies that provide a death benefit similar to UL option II. Thus, the death benefit of these policies equals a level face amount plus the balance in the cash accumulation account.
- Some CAWL policies link the current interest rate to a specific index, such as the yield on Treasury bills or an index of high-grade corporate or government bonds. This has become more common in recent years because of the historically low interest rates of the past decade.
- Policyowners usually may withdraw the excess in the cash accumulation account without impairing the base policy, subject to any surrender charges.
Features of traditional level premium life insurance possessed by CAWL include:
- level premiums and a level face amount between each “redetermination period;”
- a minimum interest guarantee;
- guaranteed maximum mortality charges;
- minimum guaranteed cash values;
- nonforfeiture values;
- a policy loan provision;
- a reinstatement period; and
- settlement options.
Contract provisions similar to traditional forms of insurance that policyowners can obtain as options in CAWL include:
- waiver of premium;
- guaranteed purchase of insurability;
- accidental death benefits; and
- cost of living adjustments.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM