Default Guide. Variable Universal Life. Prepared and published by the Customer Value Center Ed. 10/2010 FOR INTERNAL USE ONLY

Transcription

1 Default Guide Prepared and published by the Customer Value Center Ed. 10/2010

2 Table of Contents Overview Premiums Death Benefit Guarantees How do loans and withdrawals affect the guarantees? How does a variable universal life policy go into default? How does a variable universal life policy in default become active again? How can the client restore the Death Benefit Guarantee? Default Timeline Frequently asked questions about policies in default Customer Value Center

3 Overview, PruLife Custom Premier and PruLife Custom Premier II provide whole life coverage, offering the policyowner premium flexibility, which includes the ability to maintain a no-lapse guarantee, or Death Benefit Guarantee, provided there are no outstanding loans or withdrawals. Premiums, PruLife Custom Premier and PruLife Custom Premier II are flexible premium policies. The only premium contractually required is the Minimum Initial Premium (MIP), which equals 9% of the annual Target Premium. The MIP places the policy in force up to the first monthiversary following the policy date. After the Minimum Initial Premium, the policyowner may elect to be billed regularly for a modal premium of Annual, Semi-Annual, Quarterly, or a Monthly Electronic Fund Transfer (EFT). The client may also elect to receive no bill at all. The billed premium amounts are set by the policyowner. They can be any amount the policyowner chooses, subject to contractual minimums. However, even with the premium flexibility in these products, the policyowner should be strongly encouraged to pay at least the Target Premium for the first five years to avoid policy lapse. This is recommended because the net cash value (equal to the Contract Fund less any surrender charges and less any policy debt) can be low in early years. 2

4 Death Benefit Guarantee premiums are based on annual payment cycles. To determine the amount needed to secure any variable universal life product s offered Death Benefit Guarantee, apply the percentage listed in the chart to the annual guarantee premium amount required. Payment Frequency Percent of Annual Premium Monthly* 9% Quarterly 26.5% Semi-Annually 52% Annual 100% *To secure a guarantee, Monthly EFT should be set up to pay before the monthiversary. Death Benefit Guarantees Sold 01/1997 to 03/2001* has two different levels of Death Benefit Guarantees. There is a Limited Guarantee and a Lifetime Guarantee. The premium amounts needed to secure these no-lapse guarantees on an annual basis are provided in both the new business sales illustration as well as the policy itself. *Product availability may vary by state. Limited Death Benefit Guarantee: Payment of the Limited Premium, also known as Target Premium, before the policy anniversary guarantees that, as long as there are no loans or withdrawals, the policy will not lapse for a specific amount of time, regardless of investment performance. The length of the Limited Guarantee is determined on a case-by-case basis depending on the insured s age and sex (except where unisex rates apply), smoker/nonsmoker status, death benefit type, and extra rating class, if any. 3 Customer Value Center

5 In most cases, the Limited Guarantee lasts until a policy anniversary somewhere between the Insured s 65th and 75th birthday. (In Massachusetts, the limited death benefit guarantee is generally five years.) Lifetime Death Benefit Guarantee: Payment of the policy s Guideline Premium before the policy anniversary guarantees that, as long as there are no loans or withdrawals, the policy will not lapse, regardless of investment performance for the lifetime of the insured. The Guideline Premium, which is shown on the policyowner s sales illustration, is higher on a policy with a variable death benefit than on a policy with a fixed death benefit because the net amount at risk is greater. It is also significantly higher than the Target Premium. NOTE: Any late payments can jeopardize the Death Benefit Guarantee. Premiums must be paid when due since payments are applied as of the date received regardless of due date. The length of the guarantee may vary by issue state and issue age. PruLife Custom Premier Sold 03/2001 to 05/2004* PruLife Custom Premier has three different levels of Death Benefit Guarantees. There is a Short Term Guarantee, a Limited Guarantee, and a Lifetime Guarantee. The premium amounts needed to secure these no-lapse guarantees on an annual basis are provided in both the new business sales illustration as well as the policy itself. *Product availability may vary by state. Short Term Death Benefit Guarantee: The duration of the Short Term Death Benefit Guarantee is five years. Paying the policy s Short Term Premium before the policy anniversary guarantees the death benefit, as long as there are no loans or withdrawals regardless of investment performance. 4

6 Limited Death Benefit Guarantee: The duration of the Limited Death Benefit Guarantee lasts until approximately age 65, or 10 years, whichever is later. Paying the policy s Limited Premium, also known as Target Premium, before the policy anniversary guarantees that, as long as there are no loans or withdrawals, the death benefit is guaranteed regardless of investment performance. Lifetime Death Benefit Guarantee: Payment of the policy s Lifetime Premium before the policy anniversary guarantees that, as long as there are no loans or withdrawals, the policy will not lapse for the life of the insured, regardless of investment performance. The Lifetime Premium, which is shown on the policyowner s sales illustration, is higher on a policy with a variable death benefit than on a policy with a fixed death benefit because the cost of insurance increases as the death benefit increases. It is also significantly higher than the Target Premium and the Short Term Premium. NOTE: Any late payments can jeopardize the Death Benefit Guarantee. Premiums must be paid when due since payments are applied as of the date received regardless of the due date. Short Term, Limited, and Lifetime Death Benefit Guarantees are not always available. For example, policies with a Guideline Premium Test definition of life insurance or a Type C (return of premium) death benefit cannot have a Lifetime Guarantee and policies with Target Term Rider can only have a Short Term Guarantee. The length of the guarantee may vary by issue state and issue age. PruLife Custom Premier II Sold 05/2004 Current* PruLife Custom Premier II also has three different levels of Death Benefit Guarantees. There is a Short Term Guarantee, a Limited Guarantee, and a Lifetime Guarantee. The premium amounts needed to secure these no-lapse guarantees on an annual basis are provided in both the new business sales illustration as well as the policy itself. *Product availability may vary by state. 5 Customer Value Center

7 Short Term Death Benefit Guarantee: Paying the policy s Short Term Premium before the policy anniversary guarantees that, as long as there are no loans or withdrawals, the policy will not lapse during the Short Term Guarantee Period, regardless of investment performance. Short Term No-Lapse Guarantee Provision 05/ /2008 Issue Age Duration years 60 and up 5 years Short Term No-Lapse Guarantee Provision 05/2008 Current Issue Age Duration years 60 and up 6 years Limited Death Benefit Guarantee: Paying the policy s Limited Premium, also known as Target Premium, before the policy anniversary guarantees that as long as there are no loans or withdrawals, the policy will not lapse during the Limited Guarantee Period, regardless of investment performance. Limited No-Lapse Guarantee Provision 05/ /2008 Duration Until the insureds age of 70, or 10 years, whichever is later Limited No-Lapse Guarantee Provision 05/2008 Current Duration Until the insureds age of 75, or 10 years, whichever is later Lifetime Death Benefit Guarantee: Payment of the policy s Lifetime Premium before the policy anniversary guarantees that, as long as there are no loans or withdrawals, the policy will not lapse for the life of the insured, regardless of investment performance. 6

8 The Lifetime Premium, which is shown on the policyowner s sales illustration, is higher on a policy with a variable death benefit than on a policy with a fixed death benefit because the cost of insurance increases as the death benefit increases. It is also significantly higher than the Target and Short Term Premium. NOTE: Any late payments can jeopardize the Death Benefit Guarantee. Premiums must be paid when due since payments are applied as of the date received regardless of the due date. Short Term, Limited, and Lifetime Death Benefit Guarantees are not always available. For example, policies with a Guideline Premium Test definition of life insurance or a Type C (return of premium) death benefit cannot have a Lifetime Guarantee and policies with Target Term Rider can only have a Short Term Guarantee. The length of the guarantee may vary by issue state and issue age. How do loans and withdrawals affect the guarantees? Loans: If the outstanding loan, including interest, exceeds the cash value of the policy, the policy will lapse even if the no-lapse guarantee or Death Benefit Guarantee is in effect. If the loan is repaid in full, including all loan interest due, and all requirements are met for the guarantee provision, then the policy will again be protected from lapse. In addition to having an effect on the guarantee, loans affect policies in other ways. All loans reduce the policy s available net cash value and the amount payable upon the death of the insured. Fund Withdrawals: Withdrawals are considered a removal of premium from the policy and a processing fee is charged. If the amount of the withdrawal reduces accumulated premiums received to an amount less than the accumulated premium due for the current death benefit guarantee period, the guarantee will no longer be in place. 7 Customer Value Center

9 Any repayment of a Fund Withdrawal is treated as a new premium payment. All applicable charges, including premium tax and sales loads, will be assessed the same as any other premium payments. In addition to a possible impact to the no-lapse guarantee, withdrawals affect policies in several other ways. For instance, withdrawals may have tax consequences. They will also reduce the policy s: Net cash value Payable death benefit Contract Fund value Base policy face amount when processed on a Type A (fixed) Contract, causing a possibility of: a surrender charge being imposed, and/or the policy being reclassified as a Modified Endowment Contract (MEC). How does a variable universal life policy go into default? On each policy monthiversary, default testing is performed after monthly deductions are taken and, if applicable, after loan interest is capitalized. If the policy fails the test, it is said to be deficient, or in default. Default Timeline (Illustrated on page 11) The monthiversary test examines the contract fund minus any loan principal and surrender charges if applicable. If the policy does not have a Death Benefit Guarantee, and the cash value minus the loan principal and surrender charges is less than or equal to zero, the policy fails the test. After failing monthiversary testing, the policy begins a 61-day grace period. The first day of the grace period is the day the initial Default Notice is mailed. Administratively, the Default Notice is mailed one day after the monthiversary test is failed. 8

10 How does a variable universal life policy in default become active again? The policy continues to provide insurance coverage through the last day of the 61-day grace period. To prevent the policy from lapsing without value at the end of the grace period, the policyholder must remit the amount needed to bring the policy out of default, as specified on the initial Default Notice. If this amount has not been received on or before the 30th day of the grace period, a second Default Notice is sent. This notice provides the same amount listed on the initial notice. If the required amount has not been received on or before the grace period expiration date, the policy will lapse with no value. No insurance coverage is provided by a lapsed policy. Policies lapse with no value, as there is NO non-forfeiture provision. In order to restore insurance coverage, the policyowner must request reinstatement. Once a policy lapses and requires a reinstatement, the premium amount needed to reinstate may be substantially higher than it would have cost to restore the Death Benefit Guarantee for the same policy prior to its lapse. If the full payment is received during the grace period, the policy is no longer in default. If a payment received during the grace period is less than the amount required to bring the policy out of default, the money is returned to the policyowner. Only a payment sufficient to pay the entire amount due will be accepted. Paying the minimum deficiency amount will restore the policy to an active status; however, it may not be sufficient to restore the Death Benefit Guarantee. 9 Customer Value Center

11 How can the client restore the Death Benefit Guarantee?, PruLife Custom Premier and PruLife Custom Premier II allow the client to restore a Death Benefit Guarantee, as long as it is available. If the client does not currently have a Death Benefit Guarantee and wishes to obtain one, they may do so by paying the amount of premium that would have been needed to maintain the Death Benefit Guarantee accumulated at 4% interest. The Customer Value Center s Complex Response Team can assist you with calculating the amount needed. Call The Complex Response Team is available Monday Friday from 8:00 a.m. to 4:00 p.m. Central time. 10

12 Default Timeline Day 0 Day 1 Day 31 Day 62 Monthiversary Testing (Default Test) First Notice of Default (1st Letter) Requests the lesser of: 3 months of maximum charges, or A payment sufficient to guarantee the death benefit to the grace period end date Second Notice of Default (2nd Letter) Requests the same amount as the First Notice of Default Final Notice: Policy is Lapsed (3rd Letter) This letter requests the amount needed to reinstate. It includes the following: Amount needed to bring the net cash value to zero Back charges Loan interest Minimum payment for future charges Year 5 Reinstatement period ends The 61-Day Grace Period begins at Day 1. The Notice of Default is mailed to the owner on the next business day after default processing. NOTE: If a payment received during the grace period is less than the amount required to bring the policy out of default, the money is returned to the policyowner. There is no rolling grace period. 11 Customer Value Center

13 Frequently asked questions Q. The market has come back since the policy went into default. Why is the policy still in default? A. Once in default, the policy s values are frozen or locked in. At a minimum, the payment shown on the Notice of Default must be made in order for the policy values to be re-calculated and any investment returns (whether positive or negative) realized. Q. The client has made all of the payments towards a Death Benefit Guarantee. Why are they in default? A. If the client has paid sufficient premiums on time to maintain the Death Benefit Guarantee and the policy has gone into default, it is likely that they have either taken a fund withdrawal or a loan on the policy, or they may be making payments late. If the client is on EFT, they may be paying each month s premium after the monthiversary. Q. What happens if the client makes a premium payment during the grace period but it is not sufficient to bring the policy out of default? A. If a payment received during the grace period is less than the amount needed to bring the policy out of default, the money is returned to the policyowner. Only a payment sufficient to pay the entire amount required will be accepted. If the amount required has not been received on or before the grace period expiration date, the policy lapses with no value. 12

14 about policies in default Q. Can the client request a loan to make the required payment to prevent the policy from lapsing? A. No. Loans to pay premiums on a policy are not available. Q. The client has EFT or pays every month; how can the policy be in default? A. This situation could have occurred for numerous reasons. The client may have: missed a payment taken a fund withdrawal taken a loan made regular payments less than the amount required to maintain a Death Benefit Guarantee paid premiums later than the monthiversary Previous Death Benefit Guarantee may have expired (paying Short Term Premium vs. Limited Premium or paying the Target Premium vs. Lifetime Premium) Q. None of the above situations apply for my client s policy. Are there any other reasons a policy would not have a Death Benefit Guarantee in effect? A. The policy may have been issued other than applied for, which increased the premium needed to secure a Death Benefit Guarantee, and the Billed Premium may not have been increased following the delivery of the contract. 13 Customer Value Center

15 If you have any further questions about: PruLife Custom Premier PruLife Custom Premier II or if you would like assistance with a client s policy, please call the CVC s Complex Response Team at Monday Friday from 8:00 a.m. to 4:00 p.m. Central time. Before investing, clients should carefully consider the contract and the underlying portfolios investment objectives, risks, and charges and expenses. The contract s prospectus and the underlying portfolios prospectuses contain this and other important information. Prospectuses are available at for the contract and each underlying portfolio. Clients should read all related prospectuses carefully before investing. was issued by Pruco Life Insurance Company in all states except New York, where it was issued by The Prudential Insurance Company of America. PruLife Custom Premier variable universal life is issued by Pruco Life Insurance Company in all states except New Jersey and New York, where it is issued by Pruco Life Insurance Company of New Jersey. PruLife Custom Premier II is issued by Pruco Life Insurance Company in all states except New York, where it is issued by Pruco Life Insurance Company of New Jersey. All variable life is distributed by Pruco Securities, LLC. All are Prudential Financial companies located in Newark, NJ. All guarantees are based on the claims-paying ability of the issuing company. VALU-D4215