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Sales inducements are benefits provided to policyholders that are in excess of current market conditions or other similar contracts. The three main types of sales inducements are immediate bonuses, persistency bonuses, and enhanced crediting-rate bonuses. Immediate bonuses, sometimes referred to as day 1 bonuses, are additional amounts credited to policyholders’ account balances upon signing the contract. A persistency bonus is an additional amount credited to a policyholder’s account balance at the end of a specified period if the contract remains in force at that date. An enhanced crediting-rate bonus is a higher crediting rate for a specified period in relation to other similar contracts.
The sales inducement benefits that meet specified criteria are deferred as assets rather than being immediately expensed. The guidance in ASC 944-30-25-6 and ASC 944-30-25-7 specifies the criteria to be met for a sales inducement to be deferred:

ASC 944-30-25-6

Paragraph 944-30-25-7 addresses sales inducements that may be deferrable if the insurance entity can demonstrate that the sales inducement amounts have both of the following characteristics:

  1. The amounts are incremental to amounts the entity credits on similar contracts without sales inducements.
  2. The amounts are higher than the contract’s expected ongoing crediting rates for periods after the inducement, as applicable; that is, the crediting rate excluding the inducement should be consistent with assumptions used in contract illustrations and interest-crediting strategies.

Due to the nature of day-one bonuses and persistency bonuses, the criteria in items (a) and (b) generally are met for such sales inducements.

ASC 944-30-25-7

Amounts specified in the preceding paragraph shall be deferred and amortized using the same methodology and assumptions used to amortize capitalized acquisition costs if the sales inducements have both of the following characteristics:

  1. The sales inducements are recognized as part of the liability under paragraph 944-40-25-12.
  2. The sales inducements are explicitly identified in the contract at inception.

The assessment of “similar” contracts is limited to contracts issued in the same interest-crediting period that provide interest rate crediting for the same period and contain other comparable contract features. Comparable contract features may include the type of contract (e.g., single premium deferred annuity, flexible premium deferred annuity, variable annuity, universal life, variable universal life), annuity guarantee rates, and the existence of similar types of charges (e.g., surrender charges, mortality and expense charges, administrative expenses) although amounts may differ between the similar contracts.

3.6.1 Subsequent accounting for deferred sales inducements

Deferred sales inducement assets associated with universal life-type contracts are required to be amortized on a straight-line basis and do not accrete with interest in accordance with ASC 944-30-35-18. For deferred sales inducement assets, the current guidance explicitly requires that amortization be based on the same methodology, factors, and assumptions used to amortize DAC. This is because these also represent past payments or fees that have been deferred. Therefore, these balances are subject to the same amortization approach as DAC. However, because sales inducements are amount payable to policyholders, the amortization is recognized as a component of benefit expense, and not as a component of acquisition expenses.
While DAC is a deferred third-party cost similar to a debt issuance cost, and therefore not subject to an impairment test, the nature of sales inducement assets relating to universal life insurance contracts is different. These balances are contract cash flows and therefore should be included in universal life insurance premium deficiency tests. That is, the deferred amounts would be part of the net liability balance that would be compared to future net cash flows to determine if the net liability balance is sufficient to cover future net cash outflows.
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