Universal Life - Ch 4

Ch 4: Universal Life Insurance

cost of insurance (COI)

the charge the insurer deducts to cover the risk of paying the death benefit. this cost increases with age and varies based on health, lifestyle, and the chosen death benefit option.

investment returns

the earnings generated from the investment account within the policy. these returns depend on the performance of the investments chosen by the policyholder.

expenses

charges for administrative costs, such as underwriting, claim processing, and policy servicing. expenses may be calculated as a % of premiums or as flat fees.

minimum premium

covers only the COI and expenses. paying the minimum premium keeps the policy in force but provides little or no cash value growth.

maximum premium

maximizes contributions to the investment account, taking full advantage of the tax-sheltered growth opportunity. are limited to ensure the policy maintains its tax-exempty status.

flexible premium options

policyholders can reduce, increase, or temporarily stop premiums as long as the cash value can cover the COI and expenses. if the cash value is insufficient to cover deductions, the policy will lapse unless additional premiums are paid.

single life

covers on individual

multiple lives

joint policies cover 2 or more individuals, such as a couple

yearly renewable term (YRT)

• COI is recalculated annually based on the insured’s age and risk profile

• every single age from 0-100 is assigned a COI that increases over time

level cost of insurance (LCOI)

• COI remains fixed throughout the policy term

• will not increase over time

guaranteed COI

the COI rate is fixed and cannot change

adjustable COI

insurers may adjust COI based on actual experience with mortality, investment returns, or expenses.

level death benefit

pays the original face amount of the policy

level death benefit + account value

combines the face amount with the policy’s cash value

level death benefit + cumulative premiums

pays the face amount plus all premiums paid (gross, before deductions).

indexed death benefit

adjusts the death benefit annually for inflation, typically tied to the Consumer Price Index (CPI).

daily interest accounts

low-risk accounts with guaranteed principal and interest

guaranteed investment accounts

fixed-rate investments for a set term, similar to GICs, offering predictable returns.

index funds

investments tied to stock market indices. returns are higher but subject to market risk.

positive returns

boost cash value, allowing the policyholder to maintain coverage with minimal premiums.

negative returns

reduce cash value and may require higher premiums to keep the policy in force. poor performance can lead to policy lapse if cash value is insufficient to cover COI and expenses.

partial withdrawals

reduce both the cash value and the death benefit

premium offsets

investment income can be used to pay the policy’s COI and expenses, reducing or even eliminating the need for out-of-pocket premiums

leveraging

policyholders can borrow against their UL policy to invest in other opportunities. this strategy carries risks if the investment does not perform well.

limited pay COI

fixed COI and fixed premium payment periods of usually 10, 15 or 20 years