This type of policy blends a base of WL with a term insurance component, for example, a $1 million policy is $200,000 of WL and $800,000 of term. The WL portion offers the guarantees associated with traditional WL for that portion of the death benefit while the term portion offers low cost (and lower commission) coverage.
Here’s how the blended policy works. The total death benefit, the $1 million let’s say, is comprised of the guaranteed death benefit from the WL, paid-up additional insurance from the WL dividends and the term insurance. Each year, the dividends buy paid-up additional insurance, which displaces some amount of term insurance until the term insurance is totally displaced. The premium is cheaper here than for a pure WL policy because the policyholder is buying only a portion of the death benefit at the guarantees and the balance at current rates. However, if the dividends drop and/or term charges rise, that displacement will take longer, perhaps much longer. In some cases, additional premium would be required to maintain the death benefit if dividends fall far enough and fast enough for long enough. So, to cushion the policy for adequate performance under lower dividend scales, policyholders commonly add a “paid-up additions rider” or use some other mechanism that accelerates the build-up of paid-up additions.
When creating the blended policy, designers typically minimize the base WL, maximize the term and add a generous amount of low commission paid-up additions rider or an essentially equivalent mechanism made available by the carrier to support the policy at a lower projected dividend scale.
