Guides
Current-assumption universal life and crediting rates
Current-assumption universal life credits interest and charges costs at rates the insurer can change. How crediting rates work and what to watch for.
Current-assumption universal life (CAUL, sometimes "traditional" or "interest-sensitive" universal life) is flexible permanent insurance whose interest credits and policy charges follow the insurer's current assumptions, within contractual limits. When the company's investment returns or claims experience change, your cash value growth and your costs can change with them. The policy can do better than its guarantees, or worse than the first illustration suggested, so it needs checking.
The mechanics
Like all universal life insurance, the policy has a cash value account. Each month the insurer takes your premium, subtracts expense charges, subtracts the cost of insurance (COI) for that month, and credits interest to what remains. Details are in how universal life insurance works. Current-assumption design means three numbers are set by the insurer and can be revised:
- The credited interest rate. The company declares a rate on the account, usually reviewed on a schedule. The contract promises a floor, the guaranteed interest rate, often a low figure of a few percent, and the declared rate may be above it.
- Cost of insurance charges. Each month's COI is the insurer's mortality charge on the net amount at risk. The contract has a maximum COI scale set by a guaranteed mortality table; the insurer charges the current scale, which is lower and can change.
- Expense charges. Premium loads, monthly policy fees and per-thousand charges, again with contractual maximums.
The sum of all these is why these policies are called "interest-sensitive": the policy value moves with the insurer's decisions as well as the economy.
How the crediting rate gets set
A declared rate is the insurer's choice, but it follows its earnings. Most life insurers hold much of their general account in long-term bonds and mortgages. The yield on that portfolio changes slowly, as old holdings mature and new ones are bought at prevailing rates. As a result, crediting rates tend to lag market interest rates, drifting down after long stretches of low rates and rising more slowly when market rates rise. Many companies also credit a different rate on older policies than on new ones. See how interest rates affect life insurance prices and how life insurers invest your premiums for the broader picture.
A few other points:
- Banding. Some insurers pay a higher rate on larger balances.
- Bonus rates. Some pay extra interest after a certain policy year, but check whether it is guaranteed.
- Loan interest. If you borrow, the credited rate on the loaned part may be tied to the loan rate. See life insurance policy loans: how they work and what they risk.
- Illustrated vs credited. An illustration assumes today's rate continues. It is a projection only. See how to read a life insurance illustration.
Guarantees: what is promised and what is not
The contract lists the guaranteed values: the minimum interest rate and the maximum COI and expense charges. The current values are non-guaranteed elements. If the insurer credited only the minimum and charged the maximum, the policy could need far more premium than the illustration's planned premium to avoid lapse. A policy shows both on the policy illustration, and the guaranteed column is often much weaker, sometimes lapsing in midlife. That gap is the measure of how much you are relying on the insurer's current assumptions. See guaranteed vs non-guaranteed values in a policy illustration.
Companies can increase COI charges on an entire class of policies, usually citing worse mortality, lower investment yields, or lapse experience that differs from pricing assumptions. These increases triggered lawsuits against several insurers. For background see universal life cost-of-insurance increases and what to do and cost-of-insurance lawsuits against life insurers: cases and outcomes.
A hypothetical example
Say a 45-year-old buys a current-assumption policy illustrated at a 5.5% credited rate with a planned premium of $400 a month. Five years later the insurer lowers the declared rate to 4.25%. Nothing in the contract is broken, since the guaranteed floor may be 2% or 3%, but the cash value grows more slowly than shown. If the planned premium stays the same, the projected age at which the account runs out moves earlier. The owner can raise premiums, reduce the face amount, or accept a smaller projected cash value. (The numbers are invented to show the mechanism and are not market rates.)
How it compares with other policies
| Feature | Current-assumption UL | guaranteed universal life: permanent coverage without the cash | whole life insurance | Indexed universal life (IUL) explained |
|---|---|---|---|---|
| Interest | Declared by insurer, with a floor | Not the focus; premiums fixed to a guarantee | Guaranteed plus possible dividends | Linked to an index with caps and floors |
| Premium | Flexible, may need to rise | Fixed for the guarantee period | Level | Flexible |
| Cash value | Moderate | Minimal | Guaranteed schedule | Varies |
| Main risk | Rate or COI changes | Little cash value | Higher cost | Illustration optimism |
Who it suits
Current-assumption UL suits people who want permanent coverage with some premium flexibility and are willing to monitor the policy, or who want to avoid the stock-market and index-cap complexity of other UL types. It is less suitable for someone who wants a fixed cost they never need to think about, who is likely to skip reviews, or who plans to pay the minimum premium every year, because an underfunded policy is the type most likely to lapse; see why universal life policies lapse, and how to prevent it.
Keeping one in good shape
- Ask for an annual statement and compare the credited rate with the illustrated rate.
- Request an how to request and read an in-force illustration every year or two, and always before any premium change.
- Look at the date the policy would run out of value at the current rate and at the guaranteed rate.
- Pay at least the planned premium. If the account falls, correct it early; small increases early cost less than large ones late.
- Do not drop the policy because of one rate cut; check the full picture and any life insurance surrender charges explained first.
Key takeaways
- Current-assumption UL credits interest and charges costs at the insurer's current rates, within the contract's guaranteed floor and ceilings.
- Crediting rates follow the insurer's portfolio yield and usually lag market rates.
- The illustration's current column is a projection; the guaranteed column shows the downside.
- A rate cut or COI increase can mean higher premiums or an earlier lapse date, so review the policy annually.
- It suits buyers who want flexible permanent coverage and will actively monitor it.