AG 38 and guaranteed universal life — A surefire sale?

By Ron Roth

M&M Life Brokerage


Last year, we did a series of postings about indexed universal life products. A portion of this addressed no lapse guarantee products known as guaranteed universal life (GUL). This product was very simple — pay the premium each year and the policy holder is guaranteed a lifetime of coverage, regardless of market returns.

This product gained significant traction and popularity over the past 10 years. So much so that one prominent life insurance company reported that in 2011, 90 percent of their permanent life insurance policies written were GUL. The problem is that as an industry, we may have just sold too much of this product. To make matters more challenging, GUL products require the carriers to carry larger reserves than current assumption products, because of the long-term nature inherent in the product’s guarantee structure. To combat these reserve requirements, companies developed “shadow accounts” to reduce the amount of reserves necessary for their GUL book of business. The combination of the sales volume with the recent low interest rate environment (with no major changes in the foreseeable future) and the reserve requirement issues caused regulators to take notice.

In 2003, The National Association of Insurance Commissioners (NAIC) issued Actuarial Guideline XXXVIII (AG 38). This regulation was intended to voice their concerns regarding the reserve requirements on this product class and required additional capital to be posted by the insurance carriers. In typical creative fashion, the carriers developed an alternate strategy in the use of the shadow accounts. Using these accounts in their product design eliminated the need for the additional capital under AG 38.

On September 12, 2012, the NAIC adopted revisions to AG 38 and eliminated the use of shadow accounts effective January 1, 2013. This left the insurance companies with three choices:
  • increase reserves
  • raise premiums on new GUL policies
  • exit the market
We have already seen many changes in this product class and have witnessed companies who have chosen each of these three strategies mentioned above. But what is to come? It seems obvious that the market will continue to shrink and the companies remaining will be forced to raise premium rates. This translates into a huge opportunity for your clients today. If they like the guaranteed premiums and death benefits offered by this unique product class, now is the time for them to buy.

There are still carriers remaining that have not yet re-priced their products, and the current rates will look like bargains in the near future. I suggest that you reach out to these clients immediately and reinforce the future of the GUL market.