Nonforfeiture Interest Rates for Term Life Products
Some filers have sought clarification regarding the use of or have submitted filings using a higher nonforfeiture interest rate for term products. However, consistent with Valuation Manual’s VM-02 Section 3 described below, the nonforfeiture interest rate is the same across all types of life insurance products, whether term, whole life, or adjustable life (UL/VUL). The rate only varies by guarantee duration as defined in the Valuation Manual (VM-20 Section 3.C.2.a.iii). For the calendar year 2021, the nonforfeiture interest rate is 3.75% for guarantee durations longer than 20 years and 4.00% for guarantee durations of 20 years or less.
Valuation Manual’s VM-02 Section 3 states:
The nonforfeiture interest rate for any life insurance policy issued in a particular calendar year beginning on and after the operative date of the Valuation Manual shall be equal to 125% of the calendar year statutory valuation interest rate defined for the NPR in the Valuation Manual for a life insurance policy with nonforfeiture values, whether or not such sections apply to such policy for valuation purposes, rounded to the nearer one-quarter of 1%, provided, however, that the nonforfeiture interest rate shall not be less than the applicable interest rate prescribed to meet the definition of life insurance in the Cash Value Accumulation Test under Section 7702 (Life Insurance Contract Defined) of the U.S. Internal Revenue Code.
A key phrase in the above definition is “for a life insurance policy with nonforfeiture values, whether or not such sections apply to such policy for valuation purposes”. This means that the appropriate statutory valuation interest rate to use in the determination of the nonforfeiture interest rate is the rate for life products with nonforfeiture values, e.g. for life policies subject to VM-20 Section 3.B.5 or 3.A.2. This is true even for term products, where the statutory valuation interest rate for the Net Premium Reserve (NPR) is increased by 1.5% per VM-20 Section 3.C.2.b. Thus, the valuation rate used to determine the nonforfeiture interest rate in calendar year 2021 is 3.00% for guarantee durations longer than 20 years and 3.25% for guarantee durations of 20 years or less, which results in the nonforfeiture interest rate of 3.75% for guarantee durations longer than 20 years and 4.00% for guarantee durations of 20 years or less.
If you have any questions regarding this Weekly Tip or filing with the Compact, please contact the Insurance Compact Office.