Shadow Accounts: Life Insurance's Secret Weapon

A shadow account for life insurance is a value calculated similarly to a universal life (UL) cash value, but with its own set of charges. As long as the net shadow account value is positive, the policy will remain in force, regardless of whether the cash value is sufficient to cover the insurance charges. Shadow accounts are never borrowed against or withdrawn from and exist solely to keep the policy in force.

How shadow accounts work

Shadow accounts are a type of secondary guarantee that works alongside universal life insurance policies. They are calculated in a similar way to a universal life (UL) cash value but have their own set of charges. The purpose of a shadow account is to keep the policy in force, and as long as the net shadow account value is positive, the insurance policy will remain active, even if the cash value is insufficient to cover the insurance charges.

Shadow accounts are independent of the regular UL accumulation value and are used solely to determine whether secondary death benefit guarantees are in effect. They are never used to determine cash surrender values. Shadow accounts may use unique credited rates, cost of insurance factors, and loads within this calculation.

Shadow accounts are useful for insurance companies as they allow them to offer their clients a lower-cost product with more flexibility than a minimum no-lapse secondary guarantee universal life policy. They also make it easier to target a desired no-lapse period. Premiums can be structured so that the shadow account remains positive at every point, keeping the policy in force.

Shadow accounts are also beneficial for policyholders as they provide a cost-effective way to keep insurance protection in force. They are particularly useful for older individuals who may be too old to purchase term insurance or who cannot afford other types of coverage.

The design of shadow accounts is not currently regulated, which has allowed insurance companies to be creative and implement a wide variety of product designs. However, there have been some concerns raised by regulators about the potential for shadow accounts to be used to circumvent reserve requirements and the impact this could have on profitability.

Shadow accounts vs regular UL fund value

Shadow accounts and regular UL fund values are similar in that they both involve paying premiums, assessing expense charges, and crediting interest to develop the account balance. However, there are several key differences between the two.

Firstly, the purpose of a shadow account is solely to keep the policy in force, whereas a regular UL fund value can be used for other purposes, such as withdrawals or borrowing against it. This means that shadow accounts offer more flexibility to policyholders as they are not tied to the restrictions of a regular UL fund.

Secondly, shadow accounts are designed to keep the policy in force as long as the account balance is greater than zero. This is in contrast to regular UL funds, which typically have a no-lapse premium design, requiring the policyholder to pay at least the no-lapse premium to keep the policy in force. Shadow accounts, therefore, offer a lower-cost option for policyholders as they do not have to maintain a minimum premium level.

Thirdly, shadow accounts are not as widely regulated as regular UL funds. While Actuarial Guideline 38 (AG38) sets reserve requirements for shadow accounts, the actual design elements, such as interest credits, charges, and premium loads, are not currently regulated. This allows insurance companies more flexibility in designing and implementing shadow account products, which has led to a wide variation in product designs.

In terms of sales and market growth, shadow account UL products have been on the rise in recent years. The lower cost and increased flexibility offered by shadow accounts have made them a popular choice for consumers. Insurance companies have also benefited from the ability to offer lower-cost products and target desired no-lapse periods more easily. However, it's important to note that shadow accounts have drawn concern from regulators due to the potential for extended death benefit protection and the lack of regulation around design elements.

Overall, shadow accounts and regular UL fund values differ in their purpose, lapse requirements, regulation, and market impact. Shadow accounts offer a more flexible and cost-effective option for policyholders but have faced scrutiny from regulators. Regular UL funds, on the other hand, have more stringent lapse requirements and are subject to more regulation.

Shadow account charges

Shadow accounts are a type of universal life (UL) insurance product that offers secondary guarantees to keep the policy in force for longer periods than ever before. The shadow account is independent of the regular UL fund value and cannot be borrowed against or withdrawn from. Its sole purpose is to keep the policy active. As long as the shadow account is greater than zero, the policy remains in force.

The charges imposed on shadow accounts can vary significantly from company to company, with some companies imposing higher charges during the early durations of the policy and others utilising heavier charges and/or lower interest credits in the initial years to keep the shadow account balance low. These strategies help maintain the funding of the policy at an acceptable level for the company.

Additionally, shadow accounts may have a "catch-up" provision, allowing the insured to bring the account back to a positive position within a specified period if it falls to zero. This flexibility further contributes to the popularity of shadow account UL products.

How shadow accounts keep policies inforce

Shadow accounts are a type of life insurance policy that first came to market in the late 1990s. They are a form of universal life (UL) insurance that is designed to keep policies inforce for longer periods than ever before.

Shadow accounts work in a similar way to regular UL fund value. Premiums are paid, expense charges are assessed, and interest is credited to develop the shadow account balance. However, the key difference is that shadow accounts cannot be borrowed against or withdrawn from. Their sole purpose is to keep the policy inforce. As long as the shadow account is greater than zero, the policy will remain inforce.

Shadow accounts are designed to keep AG38 reserves at a level that will turn a profit, while also discouraging the use of the shadow account as a temporary protection mechanism or a short-pay vehicle. To do this, shadow accounts are structured to remain low during the initial years of the policy by utilising heavier charges and/or lower interest credits than the regular accumulation fund. This helps to maintain the funding of the policy at an acceptable level from the company's perspective.

Once the policy reaches its outer years (20 and up), the shadow account charges tend to reduce and the interest rate credited increases. This causes the shadow account to exceed the regular accumulation balance, allowing the policy to stay inforce until the maturity age, while the regular accumulation account runs out of value several years prior.

Shadow account sales

Shadow accounts work similarly to regular UL fund values. Premiums are paid, expense charges are assessed, and interest is credited to develop the shadow account balance. However, there are key differences. Firstly, shadow accounts cannot be borrowed against or withdrawn from. Secondly, their sole purpose is to keep the policy in force as long as the shadow account balance is greater than zero. This provides flexibility and allows insurance companies to offer their clients lower-cost products compared to MNLP UL plans.

Shadow account UL products gained popularity due to their cost-effectiveness and flexibility in keeping policies in force. However, their rise in sales caught the attention of state insurance regulators, who had concerns about the adequacy of statutory reserves produced under the current UL model valuation regulation. Despite regulatory challenges and the introduction of guidelines to address these concerns, shadow account UL products continued to evolve and prosper.

Today, shadow account UL products are a good option for those seeking insurance protection over asset accumulation, particularly older individuals who may be too old to purchase term insurance or afford other types of coverage. The shadow account UL market is expected to continue growing due to its cost-effectiveness and ability to provide life insurance coverage to older individuals.

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