ACLI Sends Treasury Information on Calculating Mortality Charges for Joint Life Survivorship Contracts

[1] During our meeting concerning the 2000 Business Plan item addressing Reasonable Mortality Charges, you inquired about the computation of mortality charges for joint life survivorship contracts. In connection with this discussion, you requested information concerning the formulas used in making this computation under different methods.

[2] Our member companies have advised us that currently there are two different methods for computing mortality charges on joint life survivorship contracts. The choice of method is driven by the product design features of the contract. In a joint life survivorship contract, there are two insured individuals and the death benefit is payable only on the death of the survivor of the two insureds. With some product designs, the cash value is adjusted on the first death while with other designs, there is no effect on the contract at that time. The mortality charge for a contract in which the cash value is adjusted on the first death is computed using a traditional approach. The mortality charge for a contract with no adjustment is computed using a Frasierized method.

[3] Under the traditional approach, the life insurance contract's charges and cash value reflect the status of both insured lives at all durations. Thus, for any given policy year, the mortality charges may take into account three possible future events, (1) two deaths in one year, (2) the first life dying and the second life living, and (3) the first life living and the second life dying. In all cases, the actual mortality charges take into account two separate lives with each of these three possibilities. After the first death, the mortality charges only take into account the possibility of the remaining life dying. The actual mortality charges assessed look to the mortality characteristics of the insureds (e.g., smoking status and gender). Attached is an actuarial memo illustrating these computations.

[4] Contracts calculating the mortality charges using the Frasierized method treat the coverage on the two lives as a single risk. Under the single risk status, a unique mortality table is created at issue for each pair of lives by taking into account the individual mortality characteristics of both insureds. The charges from this table continue to be applied through the life of the contract; they are not affected by the death of the first insured. Attached is an actuarial memo and numerical example illustrating these computations.

[5] As you can see from the attached materials, with both methods, the mortality charges for joint life survivorship policies take into account the mortality characteristics of both of the insureds. The main difference between the two methods is the extent to which the two insureds remain as separate lives (traditional method) as opposed to being treated as a single "status" (Frasierized method).

[6] Please contact me if you have any questions concerning the attached materials.

Sincerely yours,

FRASIER METHOD

[7] The Frasier method is a standard actuarial approach to combine ("Frasierize") single life mortality tables to determine a joint and last survivor status table. This table is used for whole life policies to determine the present value of future benefits and the present value of future adjusted premiums. Universal life policies use this method to determine the cost of insurance charges. This joint last survivor status table is used for all policy durations, regardless of whether one or both of the insureds are still alive. In contrast to the Traditional method, described in the next section, there is no increase in the policy's cash value upon the first death.

[8] The mortality charge determined under the Frasier method can be expressed as follows (ignoring interest during the period):

[equations omitted]

EXAMPLE

Assumptions: Primary Insured -- Male Age 65

[9] The Traditional method is a standard actuarial approach that combines the single life mortalities by taking into account whether one or both of the measuring lives is still alive. The present value of future benefits and the present value of future adjusted premiums are determined using joint last-survivor functions while both insureds are alive. After the first death, the adjusted premiums do not change, but the cash value calculation uses present values determined using single life functions in the same manner as for a single life policy. There is an increase in cash value upon the first death so that the policy will have sufficient cash value to provide for these higher (single function) mortality charges.

[10] While both insureds are alive, the mortality charges under the Traditional method take into account the risks associated with three contingent (and mutually exclusive events) events:

1. The risk that both insureds will die within the year, so that

[equations omitted]

Traditional Method of Determining Mortality Charge:

[equations omitted]