In a very general sense VL contracts provide two death distinct benefits. The first provides for a minimum payment and is guaranteed. The second death benefit is only paid if the actual investment return on the separate account exceeds the assumed rate of return. The insurer uses excess interest credits to buy additional blocks of insurance under this second death benefit.
Technically, the face value may increase or decrease based on a formula that relates the investment performance of the separate account to the face value. Companies use two methods to establish the relationship between the investment performance and the face amount. Under what is called the corridor percentage approach, insurers adjust the death benefit periodically so that it is at least equal to a specified percentage of the cash value, as required by current tax law. The mandated corridor percentage is 250 percent until the insured reaches age forty and then gradually declines to 100 percent by age ninety-five.
Insurers adjust the death benefit under what is called the net single premium approach so that it matches the amount of insurance that policyowners could purchase with a single premium equal to the cash value, assuming guaranteed mortality rates and a low rate of return, typically 4 percent.
Although both methods are equally valid, most policyowners find the corridor percentage method easier to understand.
As mentioned above, the insurer provides a floor that protects the beneficiary of a variable life contract. The death benefit cannot fall below a guaranteed minimum, the initial face amount of the policy. If the return on the selected portfolio, called a separate account, is greater than the rate of interest assumed at the inception of the contract, the actual death benefit may increase beyond the policy’s scheduled face amount.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM