Side Fund

  • Actuaries have long known that the mechanics of a side fund, with deductions for decreasing term insurance, parallel the mathematical structures of the reserve and cash value in traditional products.
    • Applying this analysis to universal life, both the reserve and the cash surrender value have been expressed in terms of a side fund, or account value.
    • We call this description the "Classical UL Model."

1983 - SOA - Universal Life Valuation and NonForfeiture: A Generalized Model, by Shane A. Chalke and Michael Davlin, Society of Actuaries - 72p

  • 1979-2, NAIC Proceedings
    • Side funds (see Premium deposit funds)
  • 1981-2, NAIC Proceedings
  • 2005 11 - GAO - Financial Product Sales: Actions Needed to Better Protect Military Members  ---  [BonkNote]   ---   88p  ---  [link]  
  • 2005 1117 - GOV (Senate) - A Review of the GAO Report on the Sale of Financial Products to Military Personnel, Richard Shelby (R-AL)  ---  [BonkNote]  
  • Model 568: Military sales practices model regulation - 8p
    • ...separate file for a chart of state adoption of named model law. - 5p
    • L.  "Side Fund" means a fund or reserve that is part of or otherwise attached to a life insurance policy (excluding individually issued annuities) by rider, endorsement or other mechanism which accumulates premium or deposits with interest or by other means.
    • The term does not include:
      (1) accumulated value or cash value or secondary guarantees provided by a universal life policy;
      (2) cash values provided by a whole life policy which are subject to standard nonforfeiture law for life insurance; or
      (3) a premium deposit fund which:
  • 2005 1117 - GOV (Senate) - A Review of the GAO Report on the Sale of Financial Products to Military Personnel, Richard Shelby (R-AL)  ---  [BonkNote]
    • (p61) - In its letter, NAIC’s Executive Vice President and Chief Executive Officer notes that we ask Congress to direct the states to review currently approved products being marketed to military members.
    • In response, she indicates that a number of states are examining companies that have engaged in questionable practices involving these products and that an NAIC committee plans to review life insurance sold with a side fund to recommend a position on products being offered in the marketplace in 2006.
  • 2005 1117 - GOV (Senate) - A Review of the GAO Report on the Sale of Financial Products to Military Personnel, Richard Shelby (R-AL)  ---  [BonkNote]
    • (p85) - Response to a Written Question of Senator Sarbanes from John Oxendine - Commissioner of Insurance, Georgia
    • In addition, the NAIC’s Life Insurance & Annuities (A) Committee has the following charge for 2006: Review life insurance sold with a side fund to recommend a position on the products being offered in the marketplace.
    • Life insurance with a side fund is the predominate life insurance product being sold to the military today.
    • In early February 2006, the NAIC will hold its annual commissioners conference to discuss critical issues facing State insurance regulators in 2006 and to set the NAIC’s strategic plan for 2006.
    • The NAIC will discuss the development of suitability standards for life insurance products sold to military personnel during this conference and will provide additional comment on future NAIC activity after this conference.
  • W. Keith Sloan, Actuary for the Arkansas Department, presented a statement identifying problems associated with special endowment policies or other policy forms which will frequently contain an endorsement, rider or side-fund, and which frequently are improperly sold to the public.
    • The statement by Mr. Sloan is attached to this report. (p750)
  • In executive session the subcommittee voted to establish a task force to identify the particular types of policy forms involving the problems discussed by Mr. Sloan. (p696)

1975-1, NAIC Proceedings

  • Finally, I just would like to make a small pitch for the "mystique" of whole life.
    • If we come up with a retrospective approach for nonforfeiture, then we are hastening the viewpoint that life insurance, no matter what kind is nothing more than term insurance plus a side fund.
  • I think the industry has some vested interest yet in keeping the impression that there is more to it than that.
    • It is not just term insurance plus a side fund.
  • If it is strictly term insurance plus a side fund, then we weaken our arguments for favorable tax and regulatory treatment.

--  Douglas Doll

1989 - SOA - Status Report on Standard Nonforfeiture Law Revisions, Society of Actuaries - 14p

  • When universal life was first popularized about 20 years ago, there was considerable controversy with regard to nonforfeiture compliance.
    • Was it term plus a side fund?
    • Whole life with flexible premiums?
    • Or something entirely different?

2001 - SOA - Universal Life, No-Lapse, and the Law vs. Free Markets, Society of Actuaries, by David J. Hippen, Actuary at the Florida Insurance Department - 5p

  • D. Is It Life Insurance?
    • George R. Dinney, who coined the term "universal life" in the mid 1960s, pointed out that every life insurance policy could be split into four "modules":
      • 1. Death protection exceeding the initial cash value (term insurance).
      • 2. Savings fund (cash and maturity values).
      • 3. Guaranteed life insurance (or extended term) purchase rates.
      • 4. Guaranteed settlement option (or annuity) purchase rates.
    • It is the first, third, and fourth modules that distinguish "life insurance" products from "term plus side fund" products.

1983 - SOA - Universal Life and Indeterminate Premium Products and Policyholder Dividends, Society of Actuaries - 96p

  • The revenue service raised the question,"was the universal life design a side fund with term insurance, or was it like the traditional life insurance contract where the cash value is an integral part of the overall life insurance contract?"
    • They decided it was an integrated contract, and that it would qualify under Section 101.

--  William B. Harman, Jr.

1981 - SOA - Universal Life, Society of Actuaries - 16p

  • Linton assumed the purchase of term insurance in an amount just sufficient to provide the difference between the face amount of the policy in question and the amount in a side fund.

1986-1, NAIC Proceedings (p636)

  • On the first of these, the IRS ruled that such death benelits are to be treated as life insurance proceeds, but cautioned that the cash value must be “equivalent to the cash value or reserve under a more traditional life insurance policy” and not be a “side fund” variety of cash value.

1981 - SOA - Is Universal Life Here To Stay?, John F. Fritz, Society of Actuaries - 3p

 

  • Solutions include:
    • new compensation structures,
    • a different delivery system (perhaps direct mail) for
      • term Insurance,
      • and fresh products such as ‘total life” (essentially term insurance with a side fund). 

1980 - SOA - States Club Examines Future of Life Insurance Delivery, by Ira L. Boyle, Society of Actuaries - 2p

  • In the early introductions of the UL products in Latin America, the product was “imported” by foreign insurance companies and basically the designs were a copy of the U.S. prototype.
    • With time, local companies designed their own flavors, in most cases being a term contract with a side fund (or funds) making them much more competitive in terms of price (cheaper) and compensation (lower).
  • Many countries do not have specific regulations about UL products, in particular with regards to reserves such as in the United States (CRVM, guidelines for embedded guarantees, etc.), so in some cases the laws will not fit and in some countries the authorities require companies to hold the fund value (again, with the premise that the product is a term plus a side fund), which for the typical US UL design it can put a burden on the company’s capital and should be reflected in pricing.
  • Summary and Conclusion - The illustrative exhibits below show:
    • 1) the Annualized Premiums issued by product line for Chile (APV and Other Insurance are representative of the UL business),
    • 2) the Policy Count for Mexico (Flexible Premium is representative of the UL business, Trad with Investment Funds are basically Term plus Side Fund).
  • In other countries that split is not published officially, but most of the new sales are a form of UL product (true UL or Term plus Side Fund) 

2009 - SOA - Have You Recently Considered Reviewing Your Marketing Mix? The UL Story, Society of Actuaries - 7p