Chapter 4-Universal life Flashcards
Universal life overview
- Combines permanent insurance w/ tax advantaged investing
- most flexible life insurance
- Cash value = investment accounts (may/may not be CSV)
- Premiums are deposits
- discloses how mortality costs applied, how expenses calculated, guaranteed investment returns applied to policy
Unbundling
3 pricing factors unbundled for transparency and they are not fixed
- mortality costs
- Investment returns
- Expenses
Mortality costs for UL
- reflects cost of paying death benefit
- Deducts mortality costs from investment account
Admin expenses of UL
- Deducted from investment account
- charged as % of premium or monthly fee
Expeses of UL policy
- Cost to sell insurance
- Underwriting
- issuing policy
- Income taxes
- costs to investigate claims
- profit to shareholders
Investment Income
-accumulates tax free within limits of income tax act
Flexibility of UL policy
- Timing and amount of premium
- Face amount
- Life/Lives Insured
Timing and amount of premium for UL
-Policy holder decides how much premiums will be and when to pay
If pay higher premium
- Tax sheltered growth
- Builds up cash value
can also decrease premium if investment account has enough
Factors that cause insufficient account value
-Minimally funded
-withdrawals from policy
-Decreased/Stopped premiums
returns lower than expected
Modal factor for UL
1 / NUMBER OF PMTS
FACE AMOUNT OF UL
- Any increase in face amount requires evidence of insurability (unless if have Guaranteed Insurability)
- Additional coverage based on attained age
- can impat cash value growth (
- inc FA w/o inc prem= less to invest- b/c inc mortality costs deducted from investment
Mortality costing methods
- NAAR
- Yearly renewable term (YRT)
- Level Cost of Insurance (LCOI)
- Choose YRT or LCOI
- Guaranteed vs Adjustable mortality deductions
Net Amount at risk (NAAR)
-Risk for insurance company- DEATH BENEFIT
-Policy reserve decreases risk
NAAR= DB- Investment account value
2 ways to apply risk of death to NAAR
- YRT
- LCOI
Yearly renewable term (YRT)
- One year term insurance that renews at end of policy year
- lOWER MORTALITY COSTS EARLIER ON- good for growth potential
Level cost of insurance (LCOI)
- pREMIUMD GUARANTEED TO STAY SAME FOR LIFE
- RISK OF DEATH SPREAD EVENLY OVER DURATION OF TERM (stays same)
- Higher mortality costs earlier on- preserves cash value
Death Benefit options (x4)
-Death benefit affects NAAR and mortality deductions from investment accounts
- Level Death benefit
- Level death benefit + Account value
- Level death benefit + Cumulative premiums
- Indexed Death benefit
Level Death Benefit
- straight forward
- least expensive
- Death benefit either satys at original face amount OR equals policy account value or exceeds face amount
- If deposit excess premiums INVESTMENT GROWS
NAAR=Death benefit - Account value
so when ACCT VALUE RISES, naar DECREASES
- reduced mortality deductions allow investment to groe
Level death benefit + Account value
- Inaccuraye name b/c Death benefit= FA + AV
- NAAR stays level, DB increases
- DB and AV are tax free when paid out
- good for those who deposit large premiums
Level death benefit + Cummulative premiums
- Most expensive DB option
- Death benefit= FA + Gross amt of premium (before deductions)–> refund of premiums
- Maximizes premiums
- Reduces NAAR–> which reduces mortality deductions, so invesmtnet account groes faster
- if AV more than FA + CUMM PREM., INS CO KEEPS EXCESS
NAAR= FA + CUMMULATIVE PREMIUMS - AV
Indexed death benefit
not popular
expensive
keeps up w/ inflation
Death benefit = FA indexed to CPI or rate chose
covers end of life risk thats going to increase over time
Ongoing management req by policy holder incl:
- Net premiums
- Tax deferral
- Investment Choices
- Impact of investment return on policy
Net Premiums=
Gross premiums - Premium tax- Mortality dedcutions and expenses
when mortality deductions decrease, avalable funds to invest increases
Exemptions test (re: net premiums)
Net premius may be limited to ensure tax exemptions status
- If deposit more then max net premium, exces put in NON EXEMPT side fund that is taxed annually
Tax Deferral
- Investment income earned in tax exempt investment account is NOT taxable when earned while in acct
- the tax growth is deferred until policy surrendered
Investment choice (X4)
- Daily Interest accounts (DIA)
- Guaranteed Investment accounts
- Index Fund Investments
- Mutual fund investments
Investment Choice #1: Daily Interest accounts (DIA)
-Principal guaranteed
Investment Choice #2: Guaranteed Investment accounts (GIA)
- Fixed rate for number of years
- Guaranteed minimum interest rate based on benchmark + prinicpal guaranteed
Investment Choice #3: Index Fund investments
- Interest credited to policy investment account based on performance of index chosen
- investment account may decline
- any management fees reduce investment account
Investment choice #4: Mutual Fund Investments
- Interest income based on performance of select mutual funds
- possible for investment account to decline
- any management fees reduce investment account
Accumulating fund: Non forfeiture benefits (x7)
Provides policy holder with many non forfeiture benefits
- Surrendering policy
- Policy withdrawals
- Premium offsets
- Policy loans
- Collateral for 3rd party loans
- Leveraging
- Distribution upon death
Non Forfeiture benefits: Surrendering policy
-Policy holder gets CSV
-CSV= CASH VALUE - SURRENDER CHARGES
-
Non Forfeiture benefits: Policy withdrawals (Partial Surrender)
- Withdrawals considered partial surrender
- may result in taxable income
- May impose minimum withdrawal amount UP TO max is CSV
- Surrender charges may apply
Non Forfeiture benefits: Premium offsets
- Only for participating policies
- use dividends to offset premiums
- Investment account can grow large enoigh to fund future mortality + expenses forever
Non Forfeiture benefits: Policy loans
- Gte loan from insurance against CSV (50-90% of csv)
- Not required to pay back loan but balance + interest reduces Death benefit
- Taxable disposition, so it is taxable income
- Advantage: funds co ntinue to grow tax sheltered
Non Forfeiture benefits:: Collateral for 3rd party loans
- access to capital in policy w/o taxable disposition
- using CSV as collateral
- FULL CV stays in policy to grow tax sheltered
Non Forfeiture benefits: Leveraging
- Variation of 3rd party loan
- get loan or series pf loans from bank, and the CSV nad DB used as collateral
- not repaid while alive, settled/paid on death
Non Forfeiture benefits: Distribution upon death
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Advantages of UL
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Disadvantages of UL
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