Current assumption whole life is a variation of traditional whole life that lies somewhere between adjustable life and universal life. Its cash value development is more like that of universal life than any other policy. It has a redetermination feature that essentially recasts the premium amount, and in some instances the death benefit, in reaction to the most recent interval of experience. That interval varies from one company to another but is frequently 5 years, although it can be as short as 2 years or as long as 7 years. The main feature that differentiates current assumption whole life from universal life is the absence of total premium flexibility in the renewal years (see figure 5-9).

Current assumption whole life is sometimes described as universal life with fixed premiums. This is an oversimplification since premiums can and will be restructured at specified policy anniversary dates. However, the analogy is probably useful in getting a mental image of this type of policy and how it differs from the traditional whole life policy, the adjustable life policy, and the universal life policy. It is just another example of refinements in policy design that fill in some of the missing points along a continuum of possibilities between both extremes�all fixed components and guarantees at one end and all flexible and nonguaranteed components at the other.

There are still quite a few guaranteed elements in current assumption whole life policies. There is a guaranteed death benefit and a minimum guaranteed interest rate to be credited on policy cash values. Some companies guarantee the mortality charge and the expense charges. When mortality and expense charges are guaranteed, the policy is often referred to as an interest-sensitive whole life policy because excess interest (credited interest minus guaranteed interest) credited to the cash value becomes the only nonguaranteed element in the contract. However, the bulk of the current assumption whole life policy has some degree of flexibility in the expense elements. Because many of these designs periodically recast the premium amount based on recognition of the most recent interval of experience, some of these policies are referred to as indeterminate premium whole life policies. The idea is that there is a guaranteed maximum possible premium that could be charged, but the actual mortality interest and expenses give rise to lower premium amounts actually being assessed as a result of favorable experience under the policy.

Current assumption whole life policies are nonparticipating policies that have some after-the-fact adjustment mechanisms without actually creating explicit policyowner cash dividends. These adjustment mechanisms allow the insurer to constantly fine-tune its policy and keep it competitive in the marketplace, based on actual company experience underlying the particular blocks of policies. From a company standpoint one of the big advantages of this policy design is its ability to eliminate the need for any deficiency reserve for the block of policies. Policy reserves can be calculated on the basis of the maximum chargeable premium and the minimum interest rate guarantee. Reserves will always be based on these factors even though the premiums actually collected are lower than the premium assumption underlying the reserve and, more important, are less than the guideline premium for reserve valuation.

For competitive purposes in the marketplace, current assumption whole life gives the insurance company a product with a mechanism for sharing favorable investment returns with policyowners. These policies take away the advantage that participating whole life policies had over nonparticipating whole life policies. They are not so rigid that a change in market conditions automatically renders them obsolete, as was the unfortunate case with nonparticipating whole life policies before 1980. Most of the insurance companies offering current assumption whole life policies are stock insurance companies that sold mainly nonparticipating whole life contracts prior to 1980.

Most current assumption whole life policies base their maximum possible mortality rate on 1980 Commissioners Standard Ordinary (CSO) Table rates. Since most insurance companies experience mortality significantly less costly than indicated by the CSO rates, the differential provides a very large safety margin for the insurer if it is later necessary to increase mortality rates and possibly even increase premiums on policy anniversaries when redetermination occurs.

There are some variations in the way insurance companies approach the illustration of current assumption whole life policies. As with every other type of illustration, an insurance company tries to have its illustration be enough different from any other company�s that the illustrations are not directly comparable. Nevertheless, it is possible to classify these variations into two basic categories.

The first basic category has a guaranteed cash value column and a separate column for excess accumulations (or some other descriptive title indicating that these values supplement the guaranteed cash value amounts). The total cash value for the policy is the sum of the guaranteed cash value and the accumulation supplements. The most complete representation tends to have three different columns for cash values�one for the guaranteed amount, one for the excess accumulations, and one representing the total of the two components. Any insurance company has wide discretion in how it depicts this approach in its illustrations. For example, illustrations often depict only the total cash value column and may or may not explicitly indicate that the cash value depends on projections of nonguaranteed amounts.

The second basic category merely has a single column titled "Enhanced Cash Value" (or an equivalent thereof). There is rarely any inclusion of the guaranteed cash value amount. This approach makes the policy look more like the cash value accumulation account reported under most universal life policies: premiums are shown as an incoming item that is reduced by expense charges before being added to the cash value account. Interest on the account balance is usually credited before any mortality charges are deducted. After mortality charges are deducted, the end-of-year fund balance is derived. The significant difference between the accumulation accounts in current assumption whole life and universal life is that universal life policies tend to charge off both expenses and mortality before crediting investment earnings. Current assumption whole life policies tend to deduct expenses from premiums but then credit that amount to the cash value and reflect a credit for investment earnings before deducting a mortality charge.

This approach has led many people to describe current assumption whole life as a hybrid of universal life and traditional whole life because it has cash value accumulations of excess interest crediting but still maintains a rigid level premium structure that can be changed on redetermination anniversaries.

The proportion of excess accumulations under these policy designs is highly dependent on the premium level in the base design.

Some insurance companies use a relatively low-premium current assumption whole life design. Adjustments on redetermination dates are more likely to involve an adjustment of the death benefit to make the policy compatible with the premium level being paid. However, sometimes adjustments are to the premium (up or down) which may or may not change the death benefit. At the other end of the spectrum some insurers utilize a high-premium design of current assumption whole life, where the premium paid is usually more than adequate and normally does not ever require an upward adjustment on a redetermination date. The high-premium design is more likely to involve projections of how long premiums may be needed until the policy is expected to be self-supporting without further contributions from the policyowner. It is a form of vanishing premium design. The caution, however, is that excess accumulations are not guaranteed; nor is the projected period of premium payments guaranteed to make the policy fully paid up at the end of that period. The policy will be paid up only if the future experience under the policy from that date forward is such that the interest credited and the accumulated account generate enough funds to meet all mortality charges and expenses over the entire remainder of the contract. There are no guarantees that this accumulation account might not have to be supplemented at some point if mortality charges and expenses cost more than the accumulation account can provide.

On the optimistic side, the policy could continue to exceed expectations even after it reaches paid-up status. If the investment returns on the accumulated fund keep the balance in that account more than adequate to pay all mortality charges and expenses, the policy could continue to enhance the benefits on each redetermination date. This would most likely involve an increase in death benefits since there are no further premiums to reduce at that point.

The level of premiums influences the frequency of redetermination. The lower the premium design, the more frequent the policy�s redetermination dates. In some of the more recent policy designs redetermination can be every year; more often the redetermination frequency is every 2 years or every 5 years. On policy anniversaries when redetermination is applicable, the insurance company looks at its actual experience for the block of policies since the previous redetermination date and decides what adjustments, if any, are necessary, based on the assumption that past experiences are indicative of what to expect in the period before the next redetermination.

The policyowner generally selects the method he or she prefers to adjust the policy from an available group of options when redetermination occurs. For example, if the redetermination results in a potentially lower premium, the policyowner usually has the option of continuing the past level of premiums and having the favorable results applied to enhance the policy�s cash value or increase the death benefit (assuming the insured can provide satisfactory evidence of insurability), or the policyowner may choose to pay the lower policy premium amount.

When past experience is less favorable than expectations, the policyowner again has a range of options, including lowering the death benefit, increasing the premium amount, or maintaining the status quo and allowing the policy accumulation account to decrease as the mortality and expense charges exceed the investment earnings on the accumulated fund. This last choice, if available, may have restrictions on its use.

In a current assumption whole life policy current interest rates are used to enhance the accumulation account, but the policy does not provide the premium flexibility of a universal life policy. Current assumption whole life is an appropriate policy choice for individuals who need the discipline imposed by its fixed-premium design but want to participate at least in part in the positive investment returns beyond the guaranteed interest rate in the policy. Under this type of policy the policyowner assumes some of the investment risk and a limited portion of the mortality risk. If actual experience turns out to be poor, the policy may be periodically downgraded on each redetermination date. If actual experience is positive, the policyowner participates in the upside as the quid pro quo for assuming those risks or a portion thereof. Costs in the long run may turn out to be much less than the original projections if experience is favorable enough over the duration of the contract. The real challenge with this and many other life insurance products in which policyowners assume some of the risk is to