Sales inducements (including "Day 1 bonuses," persistency bonuses, and enhanced interest crediting) should be accrued as part of the liability for policy benefits over the period for which the contracts must remain in force for the contract holder to qualify for the inducement or at the crediting date, if earlier, in accordance with ASC 944-40-25-12. See IG 5.4.1.

Guidance in ASC 944-30-25-6 and ASC 944-30-25-7 requires an entity to establish a sales inducement asset for such amounts credited to account balances if certain criteria are met. The sales inducement asset is required to be amortized and recognized as a component of benefit expense using the same methodology and assumptions as DAC. See IG 3.6 and IG 3.6.1 for additional guidance on the recognition of sales inducement assets and subsequent accounting.

An example of additional interest is a persistency bonus that is determined as a percentage of a specified future year's account balance (e.g., 1% of the account balance that exists at the end of year five). ASC 944-40-55-12 requires a persistency bonus to be accrued ratably over the five-year vesting period. Accruing using an interest rate method or at a level amount each period is appropriate. Other methods, such as using estimated gross profits, would not be appropriate as consideration of anticipated surrenders and deaths is prohibited. Separately, a sales inducement asset would be established and amortized as a component of benefit expense on a basis consistent with DAC amortization.

An acceptable approach would be to use the account balance at the end of the current reporting period as an estimate of the future account balance, and multiply that amount by 1% to estimate the persistency bonus to be paid at the end of year five. This amount would be recognized ratably over the five-year period. Cumulative adjustments would be made each period for the impact of changes in the current balance.

Several potential methods could be used. One method would be to accrue each bonus during each separate five-year vesting period. 

Another method would be to calculate the total amount of bonus interest that would be paid at contract maturity and recognize the additional interest over the life of the contract using the effective interest rate method. Alternatively, each persistency bonus can be considered separately and individually recognized ratably over the period from inception of the policy to it individual crediting date.

The liability is reversed and the forfeited persistency bonus treated as an additional surrender charge.

Yes. Bonuses on discretionary non-level deposits can be considered incremental and thus are potentially eligible for capitalization if all of the ASC 944-30-25-6 criteria are met. On the other hand, if premium deposits were scheduled and required, and if the "Day one" bonus was being offered on each premium deposit, it may be difficult for the company to clearly demonstrate that bonuses on such amounts are incremental.

If the crediting is predicated on the features that are elected, the contracts can never be similar, and thus the bonus would not be eligible for deferral.

The sales inducement asset and liability represent contract cash flows and therefore should be included in universal life insurance premium deficiency tests. Refer to IG 7.3 for further information.

Guidance related to accounting for long-duration contracts in ASC 944-605-25-6 through ASC 944-605-25-7 requires that amounts assessed against the policyholder during a period for services to be provided in future periods should be deferred. Thus, any front-end or initiation fees assessed at the inception of a contract or during the earlier years should be deferred. The recognition of revenue when front-end fees are assessed would be inappropriate as no service has yet been provided. Unearned revenue should be amortized into revenue in the same manner, and using the same assumptions, as are utilized to amortize DAC in accordance with ASC 944-605-35-2. See IG 3.5 for additional information on the amortization of DAC.

ASC 944-605-25-9 through ASC 944-605-25-10 clarify that the unearned revenue liability is separate from any additional liability for death or other insurance benefits that may be required to be established. See IG 5.8 for further information.

Unearned revenue, along with sales inducement assets and liabilities, represent contract cash flows and therefore should be included in universal life insurance premium deficiency tests. See IG 7.3 for further information.

A surrender charge is collected when the relationship between the policyholder and the insurer has been severed at the specific election of the policyholder.

Surrender charges are designed to provide for the recovery of contract origination costs that may not be fully recovered from policy profits if the policy is terminated early or to allow the entity to invest in longer term assets without disintermediation risk (i.e., the risk investments will need to be sold early when interest rates have risen). Thus, the level of surrender charges assessed against policyholders generally decreases on a sliding scale to zero after a specified period of time. Since the insurance entity cannot assess surrender charges until an event is enacted by the policyholder (e.g., termination of the policy), surrender charges (like other policyholder fees) are recognized as earned when assessed by the insurance entity.

In addition to the four components of the liability for universal life-type contracts, ASC 944-40-25-25B may require an “additional liability” for some universal life-type contracts. These liabilities are accrued for contracts or contract features that provide potential benefits in addition to the account balance that accrues to the benefit of the policyholder. These contract features protect against a policy lapsing (e.g., no lapse guarantee), offer a return based on the total return of a referenced pool of assets (e.g., indexed crediting rate tied to the S&P 500), or offer guaranteed minimum benefits (e.g., guaranteed minimum death benefit). Insurers must evaluate whether these features meet the criteria of market risk benefits (MRBs), embedded derivatives, or represent additional liabilities for annuitization, death, or other insurance benefits. See IG 2.4 for additional details of the analysis to determine appropriate classification and IG 5.6, IG 5.7, and IG 5.8 for the accounting considerations for MRBs, embedded derivatives, and additional liabilities for annuitization, death, or other insurance benefits, respectively.