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The method of financing an accelerated death benefit is an important benefit design choice under the Additional Standards for Accelerated Death Benefits for Individual Life Insurance Policies (IIPRC-L-08-LB-I-AD-3). Close attention to the filing requirements under the two approaches in the Uniform Standards highlights the differences between the two approaches and their resulting impacts on policy value and product design. In this week?s tip, we focus on these approaches ? present value approach and lien approach ? and a few other commonly overlooked aspects of the Uniform Standards.

Section 3B of IIPRC-L-08-LB-I-AD-3, Benefit Design Options, lays out two different possibilities for the design of the benefit.

? 3B(2) includes the requirements if the form allows for the present value calculation.

The standards allow a company to calculate a payment amount which is the present value (with interest and mortality) of the amount being accelerated.
The standards do not preclude the use of a 0% discount rate in the present value calculation.
Under this approach, the policyowner is essentially surrendering a portion of the policy.
The death benefit is reduced by the amount of the accelerated death benefit.
The remaining policy values (face amount, cash values, surrender charges) are reduced on a pro-rata basis.
The premiums due on the remaining policy must be reduced either on a pro-rata basis or to the amount which would be charged on the reduced face amount.
The company may reduce the payment by an amount to repay a pro-rata portion of any outstanding policy loan.
? 3B(3) includes requirements if the form allows the payment to the owner of the accelerated death benefit to be treated as a lien on the death benefits of the policy.

The Uniform Standards allow a company to establish a lien against the policy death benefit for the amount being accelerated.
The company may accrue interest on the lien at a rate not to exceed the maximum outlined in the Uniform Standards.
The Uniform Standards do not preclude the use of a 0% lien interest rate.
After the lien is established, the policy values (death benefit, cash value, premiums due) remain unchanged from the values prior to the acceleration.
The company may deduct the lien plus accrued interest from the death proceeds and surrender proceeds.
Bonus tip: Did you know that these Uniform Standards allow a charge for the rider? However, a rider charge is not permitted for a terminal illness qualifying event, regardless of the benefit design approach. See Section 3B(4) for details.

If you have any questions about the Additional Standards for Accelerated Death Benefits for Individual Life Insurance Policies, or about filing with the Insurance Compact in general, please contact the Insurance Compact Office.