• This paper considers alternative interpretations of ‘Duration’ as a length of time, average life of cash flows and interest rate sensitivity as applied to UL policy cash values.
  • The interest rate sensitivity of UL policy cash values, amplified by the corresponding cost of insurance sensitivity with declining interest income, suggests UL has always been a simple question of Duration.

AP - Universal Life Insurance Duration Measures - 14p

UL insurance was an industry response to those who planned to “buy term and invest the difference” when interest rates spiked in the late 1970s.

  • It provides underlying interest rate guarantees but also promises to pass along any higher investment earnings (leading to interesting effective duration results when cost of insurance factors are applied to a lower net amount at risk).
  • Guaranteed credited interest rates are defined by the year of policy issue.
  • Margins are managed for interest, mortality and expense, but since expense charges are generally low, profit
    and expense margins (along with cost of capital charges) come primarily from the interest and mortality components.
  • The mortality charge is based on current age and is applied to the net amount at risk, the face amount net of the tax-deferred buildup of account value.

2014 - Sustained Low Interest Rate Environment: Can It Continue? Why It Matters, Society of Actuaries - 51p