RCA - Spring 2002 - Fund Level Expenses In Variable Life Hypothetical Illustrations

NASD Regulation has determined to permit NASD member firms to reflect weighted averages of fund level expenses in variable life insurance hypothetical illustrations used with prospectuses. The illustrations depict how the expenses of the funds that underlie a given policy could affect its cash value and death benefit over time. The illustrations generally use an assumed rate of return over a long-term period such as 30 years.1


Historically, NASDR required that firms reflect an arithmetic average of the fund level expenses. Members have requested the ability to use additional illustrations that reflect a weighted average of expenses in order to give customers a clearer understanding of the relationship between their choice of underlying funds and their relative costs. NASDR has determined to permit these types of illustrations both in presentations distributed to more than one customer and in personalized illustrations prepared for individuals, provided the following conditions are met:

  • The illustration must be preceded or accompanied by the policy prospectus;

  • Illustrations used with more than one customer must be accompanied by a general illustration that reflects the arithmetic average of underlying fund expenses. The arithmetic average illustration may be in a separate document or the accompanying prospectus; and,

  • The weighted average illustration must identify the underlying fund options being used, each fund's expenses and the amount of premium allocated to each fund.

1 Pursuant to IM 2210-2, "Communications with the Public About Variable Life Insurance and Variable Annuities," members may use assumed rates of return of up to 12% provided that a 0% illustration is also included. Illustrations must depict the effect of the maximum (guaranteed) mortality and expense risk charges. The presentation also must explain prominently that the illustration is hypothetical, that it is intended to show how the performance of the underlying investment accounts could affect policy cash value and death benefit, and that it may not be used to project or predict investment results.