Often insurers initially configure CAWL to resemble a traditional whole life policy with level premiums payable for life or as a limited pay policy where higher level premiums are paid for some specified period, such as ten, fifteen, or twenty years, or until age sixty-five. At the time of issue, the premium and death benefit levels are fixed, just as with traditional whole life policies. However, after a time, called the “redetermination period,” the company recalculates the premium and sometimes the face amount using the same or new assumptions as to future interest and/or mortality. The redetermination period is commonly five years, but some companies redetermine premiums every three years or even annually.
Insurers need to do periodic redeterminations due to uncertainty of the value of the cash accumulation account. The insurer determines the new premium such that, together with the current cash accumulation account value, the new premium payment schedule will be able to maintain a level death benefit to the end of life under the current interest and mortality assumptions. The insurer guarantees that the premium will never exceed a certain maximum. The guaranteed maximum premium is the premium computed using the minimum interest guarantee and the maximum mortality charges stated in the contract.
If the redetermined premium is lower than before, the policyowner may usually choose one of three options:
- Continue to pay premiums at the old higher level, maintain the old face amount, and add excess premiums to the cash accumulation account. This option effectively shortens the premium paying period until the policy reaches paid-up status.
- Pay the new lower premium and maintain the old face amount.
- Continue to pay premiums at the old higher level and use the excess premiums to pay for an increased death benefit, subject to proof of insurability.
If the redetermined premium is higher than before, the policyowner may usually choose one of three options:
- Continue to pay premiums at the old lower level with the face amount reduced to the level supportable at that premium level.
- Pay the new higher premium and maintain the old face amount.
- Continue to pay premiums at the old lower level, maintain the old face amount, and draw down the cash accumulation account to pay the premium deficiency. To elect this option, the cash accumulation account value must exceed certain minimums necessary to sustain the policy until the next readjustment period.
When and if the policy’s cash accumulation account exceeds the amount necessary to fully fund the current death benefit for life (that is, it equals or exceeds the net single premium based on current interest and mortality assumptions), the policy is very much like a traditional paid-up policy. However, it is not exactly the same as a traditional paid-up policy. The policyowner may discontinue paying premiums only for as long as the cash accumulation account continues to exceed the net single premium at each redetermination period. If the accumulation account falls below this net single premium amount, the policyowner will have to pay additional premiums to maintain the current face value or accept a reduction in the face amount of coverage. The policyowner may proceed under one of the three options described above when the redetermined premium increases.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM