Chapter 6-Universal Life Insurance

Question 1

What are the characteristics of a universal life policy?

Answer 1

-High degree of premium flexibility
-Choice of level death benefit design or increasing death benefit design
-Adjustment provisions similar to adjustable life policies
-Has a minimum level of premium that must be paid in the first policy year
(then there is flexibility to increase or decrease renewal premiums or skip payments)
-Cash values in the policy at premium due dates must be sufficient to cover the next 60 days of mortality and expense charges (some companies replaced expense charges with surrender charges in case of lapsed policies within a certain period-higher charges in early years that gradually decrease is common)

Question 2

How is prefunding related to universal life policies?

Answer 2

• The level of prefunding determines the amount of investment risk borne by the policyowner
• Minimal or no prefunding by the policy owner, results in increasing premiums as the insured grows older to cover the rising cost of mortality

Question 3

How are withdrawals handled in universal life policies?

Answer 3

• No interest is charged on withdrawals
• Partial withdrawals are permitted
• Partial withdrawals do not lower the death benefit in the level death benefit policy design (mortality charges increase) and do lower the death benefit in the increasing death benefit policy design (mortality charges do not increase)

Question 4

What are the characteristics of a target premium in a universal life policy?

Answer 4

• Target premiums are suggested amounts not obligations to keep the policy in force
• Aggressive marketing insurance companies may set lower target premiums than conservative marketing companies
• Additional premium payment beyond the target premium is allowed
• Target premiums may be insufficient to keep the policy in force at advance ages

Question 5

How are increasing death benefit universal life policies designed?

Answer 5

The death benefit is a constant amount paid in addition to the cash value

Question 6

How are increasing death benefit universal life policies designed?

Answer 6

-The death benefit may increase if the cash value becomes so high that the death benefit to savings element no longer satisfies IRS requirements

Question 7

How are policy loans handled in universal life policies?

Answer 7

• Loans are permitted
• Reduced interest rates are credited to the portion of policy taken as a loan
• Current interest rates are credited to the entire cash value if there are no outstanding loans
• The death benefit decreases under the level and increasing death benefit design

Question 8

To assess competitiveness of universal life policies, what should be considered?

Answer 8

• Interest rate credited
• Mortality rates charged
• Timing and amount of surrender charges

Question 9

What are the characteristics of a indexed universal life policy?

Answer 9

• Not regulated by the SEC or FINRA
• Lowered guaranteed rates are offered than traditional policies
• Policies typically perform better than the guaranteed rate because there is an ability to participate in the increase in the stock market (guaranteed plus market increase)