Guaranteed Universal Life has been a star life insurance product for a number of years. It became the number one answer to permanent death benefit for the lowest possible premium.
But now competition has driven premiums to a new level where agents and their back offices are squeezing premiums everywhere. As we discussed yesterday, there's a rampant practice of adjusting premium by playing with the guaranteed period, without discussing this with the client.
The fact it mortality continues to improve, the forthcoming CSO (2014 most likely) already hints at improved mortality among Americans, and we cannot ignore that mortality for those with certain diseases has greatly improved over the past few decades. Conditions that once created rated or declined decisions from carriers are not receiving standard to standard plus offers. This fact alone requires careful planning when it comes to deciding on a guaranteed period for those with health issues.
Shadow Accounts: Dude Where's My Guarantee?
For years, actuaries have designed Guaranteed Universal Life with two accounts. The general cash account that was clearly seen on the policy, and a shadow account. The shadow account was a sort of reserve that remained under observation internally at the insurance company, but was never released to the client, or their agents.
The shadow account modeling allowed for assumptions that some might find odd. Premiums could be assumed at above target and interest earned on the account was typically much higher than market rates.
The problem is some policy holders have found themselves in positions where they needed to fund the shadow account to keep their contract in force. And in order to do this, there was a substantial increase in premium.
Whether or not the guarantee will disappear and the true reserving will be needed to keep the policies in force remains to be seen. What we do know is that life insurance contracts are contracts of adhesion meaning the ambiguity that this creates will not hold up very well in favor of the insurance company if it requires legal interpretation of what exactly the guarantee in a guaranteed universal life contract.