Universal Life’s Policy Review: The Critical Need for Stress Testing
Due to the flexible, non-guaranteed nature of Universal Life (UL) and Indexed Universal Life (IUL), an annual review must include a **stress test**—a simulation of poor economic conditions to ensure the policy’s long-term solvency.
The Stress Test Scenario
A proper stress test should project the policy’s performance under two adverse scenarios:
- **Low/Zero Interest Rate Scenario:** The illustration is run assuming the crediting interest rate is only the guaranteed minimum (e.g., 0% or 1%) for a prolonged period.
- **Increasing Cost of Insurance (COI) Scenario:** The illustration shows the impact of the COI increasing as expected, with minimal cash value growth to offset it.
The Goal of Stress Testing
The stress test identifies the **”safe-harbor” premium**—the payment level needed to prevent the policy from lapsing in a worst-case scenario. If the current premium payment is lower than the safe-harbor premium, the policyholder needs to increase payments immediately to safeguard the coverage.
Disclaimer: This content is for informational purposes only and is not financial or legal advice. Request a stress-tested illustration from your agent every few years to manage lapse risk proactively.