Chapter 4 Universal Life Insurance

What is Universal Life (UL) insurance?

Permanent insurance with flexible premiums + investment component.

What makes UL unique?

Flexibility + control (premiums, investments, death benefit)

What does unbundling mean in UL?

Separates:

• Mortality cost (COI)

• Expenses

• Investment

What is COI?

Cost of insurance (cost of death risk)

How are UL premiums different?

Flexible (can increase, decrease, or skip)

What is the minimum premium?

Just enough to keep policy active (no cash value growth).

What is maximum-funded UL?

Paying extra to maximize tax-sheltered growth.

What happens if cash value is too low?

Policy can lapse

What happens if you increase face amount?

COI increases.

What happens if you decrease face amount?

COI decreases → more cash value growth.

What is NAAR?

Death benefit − cash value.

What happens to NAAR over time?

Decreases as cash value grows

What is YRT (Yearly Renewable Term)?

COI increases each year

YRT advantage?

Low cost early.

YRT disadvantage?

Expensive later.

What is LCOI (Level COI)?

Fixed cost for life.

LCOI advantage?

Predictable long-term costs.

LCOI disadvantage?

Higher early cost.

4 UL death benefit options?

• Level

• Level + account value

• Level + premiums

• Indexed

Cheapest option?

Level death benefit.

Most expensive option?

Level + cumulative premiums

Investment Component

What happens to premiums after costs?

Invested into account (cash value).

How is investment growth taxed?

Tax-deferred (inside policy).

What is the exemption test?

Limits contributions to keep tax-free status.

Safest UL investment option?

Daily interest account / GIA (principal guaranteed)

Highest risk options?

Index funds / mutual funds.

What causes UL policy lapse?

• Low returns

• High COI

• Low premiums

What happens if policy is surrendered?

You get cash value (minus fees).

Are withdrawals taxable?

Yes (partial surrender).

What is a policy loan?

Borrow against cash value

Effect of policy loan at death?

Reduces death benefit

Advantages of UL?

• Flexible premiums

• Investment control

• Tax-sheltered growth

Disadvantages of UL

• Complex

• Investment risk

• Risk of lapse

Who controls investments?

• UL = policyholder

• WL = insurer

Which has higher risk of lapse?

UL

Which has guaranteed growth?

Whole life.

Which offers flexibility?

UL