AG 38 is a document of guidelines drafted by the NAIC in 2013 that addresses whether or not insurers have adequate reserves for certain types of life insurance policies (specifically – universal life insurance policies that offer secondary death benefits to policyholders). If you are confused, don’t worry, below, we will go into further detail on what universal life secondary guarantee policies are.

The purpose of this AG 38 document was to ensure that insurers have enough reserves to pay out on secondary death benefit claims and to uphold the provisions in these policies.

If it sounds complicated, that’s because it is! In fact, most people outside of the life insurance industry don’t really know about these changes. While insignificant to most, AG 38 can actually affect the affordability of your life insurance in a significant way. This is why it’s important to know and understand the effects of AG38.

What Changes Did AG 38 Make?

Universal life insurance secondary reserve requirements used to be treated in the same way level term life insurance policy reserves were. Because of concerns over the adequacy of these reserves, the NAIC stepped in to make a change to the way universal life insurance policies were regulated.

Before, insurers used shadow funds to account for the reserve requirements. The complexity of these shadow fund valuations led to improper valuations, which caused a decrease in ability to uphold secondary guarantee provisions. AG 38 reduced this risk by requiring universal life secondary guarantee policies to be principle-based.

What Are Universal Life Secondary Guarantee Policies?

Universal life insurance is a type of whole life insurance that offers its policyholders a flexible premium payment structure. People buy these polices if they want permanent coverage and cash value accumulation, but also want to have the ability to adjust their life insurance bill based on their current financial situations.

Universal life insurance policies will remain active as long as the cash value of the account is positive. This means that if the cash value drops to zero, the policy will lapse.

If you buy a “universal life secondary guarantee policy”, you will eliminate the risk of having your policy lapse and guarantee the death benefit will still be there until you die. For this policy to remain active, you still must make your premium payments, but the policy will still remain active even if its cash value drops to zero. The allure of these policies is that your loved ones will still remain protected if you die, despite the cash value of the policy.

These secondary guarantees are more risky for insurers and also will increase their liability. This is because they still will have to pay benefits on claims with zero cash value. Because of this, the insurers must keep adequate cash reserves to ensure the payment of the benefits. This is the primary reason AG 38 was written.

Effects of AG 38 On Purchasing A Universal Life Secondary Guarantee Policy

The effects of AG 38 might not be very noticeable, but they still might affect your life insurance purchase. If you don’t have coverage and are thinking about purchasing a universal life policy with a secondary guarantee, we strongly advise that you compare rates from multiple life insurance carriers. By comparing rates at sites like Life Ant, you will be able to obtain affordable universal life coverage from insurance companies that follow the guidelines set in the AG 38 provisions.

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