The quintessence of flexibility, CAUL, essentially allows the policyholder to “buy term and invest the rest” within the same policy, but retain the flexibility to change the outlay and literally reshape the policy to suit changing circumstances. The carrier guarantees to credit a minimum interest rate to the cash value and to cap the cost of insurance (COI) at a certain level. Meanwhile, the carrier credits a current rate of interest and charges current COIs, that is, the current assumptions. Note the emphasis on “assumptions,” because the interest crediting rate (above the minimum) and COIs may be changed within policy limits at the carrier’s discretion.
In colloquial terms then, the carrier says to the prospective purchaser, “Tell us what you want to do. Do you want to plan on paying a premium that will merely keep the death benefit level to a certain age as long as our current COIs and credited interest are maintained? Do you want to endow the policy at those current assumptions or perhaps at a (more conservative) set of assumptions? It’s up to you! And, by the way, if you start at a given premium, you can increase it (without evidence of insurability) or cut it back if the performance warrants, without our approval.”
In exchange for this kind of flexibility, the policyholder must be vigilant, monitoring the policy annually to be sure the current premium (if any) is adequate to support the death benefit to the targeted age. That said, if the policyholder sees that, because crediting rates declined, COIs increased or both, he’ll have to increase the premium to support the death benefit; it’s his call whether to do so or by how much for how long.
Some carriers offer a means of blending the CAUL policy into base and term components. For example, a $1 million death benefit would be comprised of $250,000 of base and $750,000 of term. As a general rule, the term component will have lower loads than the base, as well as COIs that are equal to or less than the COIs in the base. Therefore, the strategy with this product is similar to the strategy for the WL/term blend described above; that is, minimize the base, maximize the term and pay as much of the premium in as “excess” premium or “dump-in” as possible.
