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We address guaranteed universal life insurance to give you the tools to determine whether guaranteed universal life is really guaranteed when carriers use shadow accounts to mitigate required reserves. Is this for real? You decide.

The Universal Life Insurance contract includes NoLapse Guarantee provisions for a guarantee of the death benefit. As long as the client pays the annual NLG premium and the cumulative NLG premium test is met, the policy will not lapse, regardless of market conditions. NoLapse Guarantees are also called Secondary Guarantees.

The Secondary, NoLapse Guarantee is an additional test. If a policy satisfies this test, coverage continues, even if the policy would have otherwise lapsed. There are two types of NoLapse qualifications used, either singly or in combination. Premium Requirement A policy might have a stated NoLapse Premium that is specific to the age, amount, and underwriting class. If the policy owner has at any time paid premiums equal to the cumulative required premium, the qualification
has been met. Many plans allow a policy to fall behind in required premiums, but include "catchup" provisions that enable requalification. Shadow Account A policy can use a Shadow
Account to determine NoLapse qualification. The Shadow Account works just like the regular policy cash account; expenses and insurance charges are debited, and interest is credited. The debits and credits are more favorable than the normal guarantees. The Shadow Account
exists only to determine qualification for the No Lapse Guarantee; the cash is not available to the policy owner. As long as there is a positive balance in this hypothetical account, the guarantee is in effect.

AG38 Regulation (Regulation #830) — commonly referred to as Regulation XXX — which set forth reserve requirements for all universal life products that employ secondary guarantees (ULSG), with or without shadow account funds. Contracts that used specifiedpremium secondary guarantees were captured by Regulation XXX, which treated them similarly to guaranteed level term contracts. AG 38 was a regulatory response to other more complex contracts that opted for a shadow fund account design in order to compensate for the increased XXX reserve requirements. As the design of ULSG products continued to evolve, a further revision of AG 38 became necessary in 2005 to deal with existence of certain ambiguities in the guideline used by sophisticated shadow fund designs.

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