Stress-testing an in-force illustration at lower crediting rates

An in-force illustration answers one question: if nothing about the policy changes except the passage of time, what happens next? It does so under assumptions about future crediting rates and charges that the insurer chooses. The stress test described here changes one assumption, the rate the policy is assumed to earn, and asks how much the answer moves. If a modest drop in the crediting rate pushes the lapse age from 100 down to 90, you have learned something no brochure was going to tell you.

This is a worksheet post. It has four parts: how to ask the insurer for the right ledgers, how to read what comes back, a repeatable calculation you can do by hand with numbers from your own policy, and how to decide what to do with the result. The calculation uses round, invented numbers. Replace them with yours. The background on in-force illustrations is in how to request and read an in-force illustration, and the general reading skills are in how to read a life insurance illustration.

Why stress-test at all

Universal life and indexed universal life policies are flexible by design. The premium, the death benefit and the way the cash value is credited can all vary. The insurer's illustration shows one path: a crediting rate assumed for every future year, and charges assumed to stay on their current schedule. Neither is a promise. The charges and the credited rate are non-guaranteed elements, and only the guaranteed column is a contractual floor.

The illustration is therefore a best-guess scenario, and it is usually the most favorable one that the rules allow. Rates earned in the future can be lower than the assumed rate for long stretches, and the cost of insurance rises with age. A policy that works only at the assumed rate is a policy with no margin for error. Stress-testing measures the margin.

Indexed policies are a special case. The assumed rate in an indexed illustration is a projection of how the index, the caps, the participation rates and the floors will interact, and it is limited by a regulatory standard described in IUL illustrations and Actuarial Guideline 49. That standard governs how the illustration may be constructed; it does not make the result a forecast. The posts on Stress-testing an IUL illustration with lower assumed rates and guaranteed vs non-guaranteed values in a policy illustration go further on that.

Step 1: Ask for three ledgers

Contact the insurer, or the agent of record, and ask in writing for an in-force illustration of your policy as of the current date. Ask for these three versions:

1. Current assumptions. The standard in-force illustration at the insurer's current crediting rate or index assumptions and current charges.
2. Guaranteed assumptions. The same policy at the minimum guaranteed interest rate and the maximum guaranteed charges stated in the contract.
3. A lower assumed rate. The illustration at an assumed rate below the current one. A drop of one to two percentage points is a common choice, and it is your decision. Some insurers will run any rate you name within limits; others offer only a set of choices.

Specify the same inputs on each request: the premium you actually intend to pay, the death benefit option, the loan balance, and the age to which you want it projected (age 100 or later). If you have a loan, include it. If you plan to stop paying premiums, say so. An illustration that assumes the wrong premium is a stress test of a policy you do not own.

If the insurer cannot run a lower rate, ask what it can run, and ask whether a representative will walk through the assumptions with you. Note the response. A refusal or an unwillingness to provide the guaranteed ledger is itself information.

Step 2: Read what comes back

All three ledgers have similar columns. Find these:

Check three things on each ledger:

• The lapse age. The first year in which the accumulation value cannot cover the charges, often shown as zero or as a note.
• The premium needed to reach age 100 (or 95). Some illustrations offer a "solve for premium" feature; if yours has one, use it.
• The pattern of charges. Look at how the annual charge changes between age 65 and 85. It tells you how much the policy depends on the account growing.

If the guaranteed ledger lapses early, as it often does for flexible policies at the current premium, that is expected; the guaranteed column assumes the worst contractual case. What matters is the distance between the columns. A gap that is very wide is a sign that the policy's survival depends heavily on assumptions you do not control. Policies with a no-lapse guarantees on universal life: how they work are different, because the guarantee can hold the policy in force at a specified premium regardless of the account value, but only if its conditions are met.

Step 3: The worksheet

If the insurer will not run a lower rate, or you want to understand what is happening, you can approximate it yourself with a roll-forward. This is a simplification that ignores many contract details (monthly deductions, expense charges, interest timing, loan interest). Use it to see the shape of the answer, not to replace the insurer's ledger.

The formula, year by year:

New value = (Old value + Premium paid − Charges for the year) × (1 + Crediting rate)

What you need from your ledger:

• A starting accumulation value and your age.
• The annual premium you will actually pay.
• The annual charge in the current year, and how fast it rises. Read two or three years off the illustration to see the growth rate.
• The current assumed crediting rate.

The worked example (all numbers invented):

Say a 65-year-old has a policy with an accumulation value of $80,000. She pays $4,000 a year. The annual charge in the current year is $3,000, rising about 9 percent a year. The illustration assumes 5 percent.

Year 1. Start: $80,000. Add premium: $84,000. Subtract charge of $3,000: $81,000. Multiply by 1.05: $85,050.

Year 2. The charge is $3,000 × 1.09, which is $3,270. $85,050 + $4,000 − $3,270 = $85,780, times 1.05 is $90,069.

Continue the same way for each year. Running the full calculation to age 100 at several assumed rates gives the table below. Values are at the birthday shown, rounded to the nearest $1,000.

At the assumed 5 percent, this policy lasts until about 93. Drop the rate by one point to 4 percent and it ends about two years earlier; at 3 percent, about three years earlier; at 2 percent, about five. The cause is the shape of the charges: they grow faster than the premium, so the policy lives on its account value in its later decades, and a lower rate reduces the account value that must carry it.

The premium needed to reach 95. Repeat the calculation, increasing the premium until the value stays positive through age 95. With the same invented charges, the answers are approximately:

The $4,000 premium she is paying now keeps the policy alive to about 93 only if 5 percent is credited each year. To be reasonably confident of reaching 95 if the rate is closer to 3 percent, she needs about $8,100, more than double. That difference is the margin that the base illustration hides.

Your blank worksheet

Fill this in with your own policy's numbers.

Do the roll-forward in a spreadsheet: one row per year, with columns for age, charge, and value. The formula is a single line you copy down.

Step 4: Decide what the result means

A stress test is not a prediction. A lower assumed rate is a what-if, and the true rate may be higher or lower. The question is how much trouble the policy is in if the future is less generous, and what you would do about it.

If the policy survives the lower-rate ledger to your life expectancy and beyond, you have margin. Keep the policy, review the ledger every few years, and take no action.

If it fails at the lower rate but only late, you have a decision to make over a longer horizon. You may prefer to raise the premium modestly now, which is usually cheaper than a large increase later. The earlier the extra premium goes in, the longer it compounds.

If it fails early at the lower rate, the policy is fragile. Options include:

• Increasing the premium, as in the table above.
• Lowering the death benefit, which lowers the net amount at risk and with it the charges. Many owners find that a smaller policy that lasts is better than a bigger one that does not; see universal life cost-of-insurance increases and what to do for how charges behave.
• Checking whether a no-lapse guarantees on universal life: how they work or other guarantee is available or in force.
• Repaying part of a policy loan; see mistakes that sink a loan-heavy policy in retirement.
• Considering whether to keep, reduce or replace the policy, with the caveats in before you replace a permanent policy: a fifteen-point checklist.

Each of those has costs and tax consequences, so involve a tax professional or fee-only planner before large changes.

What the stress test does not tell you

• The real future. It shows sensitivity, not probability.
• Hidden contract terms. A simple roll-forward ignores riders, monthly deductions, loan provisions and guarantees. Use the insurer's ledger for the final word.
• Whether the charges will actually rise as assumed. The cost of insurance is also non-guaranteed up to a stated maximum. If the insurer's current schedule is lower than the contractual maximum, the guaranteed ledger shows what could happen at the ceiling.
• Whether a replacement would be better. A replacement carries its own assumptions, fees and restarted clocks. A stress test of the old policy is not an argument for the new one; stress-test both.

Questions to put to the insurer once you have the ledgers

The ledgers raise questions that a customer service representative cannot always answer on the first call. Put them in writing and ask for a written reply:

1. Are the charges on the ledger the current charges or the maximums? The two can differ by a large margin, and the guaranteed ledger usually uses the maximums.
2. Has the insurer changed the charges or the crediting method on this policy block since I bought it? Some insurers have raised charges on older universal life blocks; the history tells you which way the risk has moved. universal life cost-of-insurance increases and what to do explains how to read such a notice.
3. What rate is the current illustration assuming, and how does it compare with what the policy has actually credited over the last five years? If the assumed rate is well above the recent experience, the base ledger is optimistic.
4. What happens to the policy if I pay less than the planned premium for a year? Some policies tolerate a missed payment; others begin to erode the guarantee.
5. Is any part of the death benefit guaranteed regardless of the account value, and under what conditions? If a guarantee exists, ask for the exact test that keeps it alive and how close you are to failing it.
6. What options do I have if the ledger shows the policy running out? Ask for the premium solve, a reduced death benefit, and any non-forfeiture or paid-up option in the contract.

An insurer that answers these promptly and in detail is making your analysis easier. One that answers in generalities is telling you to rely on your own roll-forward and on a second opinion.

A final practical point: keep the same assumptions when you compare ledgers from different years. If you request the first at 5 percent and the next at the insurer's new current rate of 4.5 percent, the lapse age may appear to move for reasons that have nothing to do with the policy's health. Note the rate, the premium and the date on every ledger.

How often to repeat it

Request the three ledgers when you first suspect trouble, then every two to three years, and any time something changes: a premium missed, a large loan, a change in the credited rate, an insurer notice about charges, or a major life event. Keep the ledgers in one folder with their dates. Comparing last year's lapse age with this year's is the quickest way to see whether the policy is moving the wrong way.

Key takeaways

• An in-force illustration shows one path based on assumed rates and charges; a stress test changes the rate to measure how much margin the policy has.
• Ask the insurer in writing for three ledgers: current, guaranteed and a lower assumed rate, at the premium you actually pay and the loan you actually have.
• The roll-forward formula, (old value + premium − charges) × (1 + rate), lets you see how fast a policy's lapse age moves; in the invented example a one-point drop moves it about two years and the premium needed to reach 95 more than doubles at 3 percent.
• Raising the premium earlier is usually cheaper than raising it later, and a smaller death benefit can make a fragile policy last.
• A stress test shows sensitivity, not a forecast, and the insurer's own ledger has the last word.