There are many advantages to utilizing Current Assumption Whole Life (CAWL). If you are unsure about buying a Current Assumption Whole Life (CAWL) policy, this simplified list will share the 9 largest benefits to this kind of policy:
- Premiums are level and fixed between each redetermination period.
- Cash value interest or earnings accumulate tax-free or tax-deferred, depending on whether gains are distributed at death or during the lifetime.
- CAWL frequently pays a higher effective interest rate on cash values than the rate available with tax-free municipal bonds.
- Cash values are not subject to the market risk associated with longer-term municipal bonds and other longer-term fixed income investments.
- Policyowners can borrow policy cash values at a low net cost. Although policyowners must pay interest on policy loans, cash values continue to grow as the insurer credits cash values with at least the minimum guaranteed rate in the policy. Consequently, the actual net borrowing rate is less than the stated policy loan rate.
- The policy is “transparent”; that is, policy illustrations and annual reports explain each of the policy elements separately. This “unbundling” allows the policyowner to specifically identify and track premiums, death benefits, interest credits, mortality charges, expenses, and cash values. Furthermore, the policyowner can compare projections with actual performance over time.
- Many polices have cost of living riders that, without evidence of insurability, automatically increase the policy death benefit periodically by the increase in the Consumer Price Index (CPI).
- In contrast with most traditional whole life policies, most CAWL policies use “back-end loads,” or surrender charges, rather than “front-end loads.” (A load is the charge imposed by an insurer to recover the initial policy expenses. The terms front-end and back-end refer to when the charge is imposed.) Consequently, most of the policyowner’s initial premiums go into cash values, subject, of course to regular annual expenses and mortality charges. Therefore, cash values build more quickly than with traditional whole life policies.
- Many CAWL policies permit policyowners to withdraw excess cash value accumulations without impairing the policy or changing the death benefit.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM