• MR. BUECHNER: The amount at risk needed in a ULI policy in order to make it life insurance is a question open to debate.
  • It's likely the IRS will eventually come out with a revenue ruling citing several abuse cases and say that in such situations the ULI policy does not qualify as life insurance for purposes of treatment under IRS code Section 101 (a).
  • The type of abuse case likely to be attacked might be one with a $1,000,000 cash value and a $10,000 pure death benefit.
  • In the book, Why Universal Life, we propose that a constant percentage of the cash value be used to purchase the pure death benefit.
    • We base the calculation on the cost of a death benefit at age 60 equal to at least 10 percent of the cash value.
    • Thus the life insurance benefit would be higher at younger ages and lower at older ages.
  • The American Council of Life Insurance's (ACLI) proposal used two approaches to define what the permissible level of risk is for purposes of determining whether or not a product is life insurance.
    • Their first proposal was that the premium payments should be limited to the amount required to mature the policy on the latest maturity date.
    • Their second proposal was to classify the cash value as a life insurance cash value if it was equal to or less than that of a single premium necessary to purchase whole life insurance or to endow the contract after a stated period.
    • Any cash value in excess of the single premium amount would be classified as an annuity.
    • The ACLI approach is a restrictive one.
      • What characterizes a product of life insurance is whether there's enough risk to put the life insurance company in a position of risk shifting and risk distribution.
      • If the amount at risk is small in comparison to the total cash value, the company is in a position where it is simply taking on an investment risk.
      • It's imperative that companies establish a minimum pure death benefit so that the policyholder cannot inadvertently place himself or herself in a position where the policy will cease to be a life insurance contract.
    • The burden is on life insurance companies to bolster the minimum rather than for the IRS to give comfort in this area.
• MR. BODINE: This question puts me in a difficult position. I can find fault with almost any suggestion set forth as being reasonable, but I haven't been able to come up with any good suggestion of my own.

1982 - SOA - Universal Life Update, Society of Actuaries (rsa82v8n34) - 26p