Flexibility

• Adjustable premiums: Can increase, decrease, skip, or make additional payments (within limits)
• Adjustable death benefit: Can increase (with underwriting) or decrease face amount
• Accessible cash value: Can make partial withdrawals or take policy loans
• Transparent costs: Shows exactly how premiums are allocated

Unbundling

Unlike whole life, universal life separates the three main components:
1. Premium payments: Flexible amounts and timing
2. Cost of Insurance (COI): Monthly charges for death benefit protection
3. Cash value account: Investment/savings component earning interest

Interest-Crediting

• Current interest rate: Rate credited to cash value (declared by insurer)
• Minimum guaranteed rate: Floor rate guaranteed in policy (typically 2-4%)
• Variable crediting: Rate changes based on insurer's investment performance
• Not guaranteed: Current rates can fluctuate (but never below minimum)

Premium Payment Flow

When a premium is paid:

1. Premium received → Policy account
2. Expenses deducted: Policy fees, administrative charges, sales loads
3. COI charge deducted: Monthly cost of insurance based on age, health class, death benefit
4. Remaining amount → Cash value account
5. Interest credited: Cash value earns interest at current rate

Example Monthly Flow

Premium paid: $500
- Administrative fee: $10
- Cost of Insurance: $150 (for $250,000 death benefit, age 45)
- Net to cash value: $340
+ Interest credited: $15 (on existing $20,000 cash value)
= New cash value: $20,355

Cost of Insurance (COI)

The monthly charge for the death benefit coverage:

• Increases with age: Higher as insured gets older (follows mortality tables)
• Based on death benefit at risk: Amount insurer must pay beyond cash value
• Health classification: Better health = lower COI
• Gender: Females typically have lower COI (longer life expectancy)
• Death benefit option: Option A vs Option B affects COI calculation

Cash Value Account

• Accumulation vehicle: Grows with net premiums and credited interest
• Reduces with: COI charges, policy fees, withdrawals, loans
• Interest crediting: Monthly crediting of current interest rate
• Access: Can withdraw or borrow against value
• Lapse protection: Must maintain sufficient value to cover COI charges

Universal life policies typically offer two death benefit options:

Option A (Level Death Benefit)

• Fixed face amount: Death benefit stays level (e.g., $250,000)
• Insurer's risk decreases: As cash value grows, net amount at risk decreases
• Lower COI charges: Less expensive since risk decreases over time
• Cash value included: Death benefit = face amount (cash value not added)
• Best for: Those wanting consistent death benefit at lowest cost

Example at Death:

Face amount: $250,000
Cash value: $80,000
Insurer's risk: $170,000
Beneficiary receives: $250,000

Option B (Increasing Death Benefit)

• Face amount plus cash value: Death benefit = face amount + cash value
• Insurer's risk constant: Net amount at risk stays level
• Higher COI charges: More expensive since risk doesn't decrease
• Growing death benefit: Increases as cash value accumulates
• Best for: Those wanting maximum death benefit and estate growth

Example at Death:

Face amount: $250,000
Cash value: $80,000
Insurer's risk: $250,000
Beneficiary receives: $330,000

Option C (Return of Premium)

• Less common: Some policies offer this third option
• Return premiums paid: Death benefit = face + total premiums paid
• Highest cost: Most expensive option

Minimum Premium

• Required: Minimum amount needed to keep policy in force
• Covers COI: Must be enough to cover monthly COI charges and fees
• Varies over time: Increases as COI charges increase with age

Target Premium

• Illustrated amount: Premium shown in policy illustration to maintain coverage
• Not required: Not contractually required but recommended
• Maintains policy: Designed to keep policy in force to age 100 or later

Maximum Premium

• Modified Endowment Contract (MEC) limit: Cannot exceed without triggering MEC status
• Seven-pay test: Based on amount that would pay up policy in 7 years
• Tax consequences: MEC status changes tax treatment of withdrawals and loans

Skip or Reduce Premiums

• Allowed if: Sufficient cash value to cover COI charges
• Risk: May shorten policy life or cause lapse
• Flexible: Can resume or increase later

Additional Premiums

• Overfunding: Can pay more than target to build cash value faster
• MEC limit: Cannot exceed without MEC consequences
• Accumulation: Excess goes directly to cash value (after expense charges)

Cost of Insurance (COI)

• Monthly charge: For death benefit protection
• Increases with age: Based on mortality tables
• Main ongoing cost: Usually the largest deduction

Policy Administration Fee

• Flat monthly charge: Typically $5-15 per month
• Covers: Policy maintenance, statements, customer service

Surrender Charges

• Early withdrawal penalty: Charged if policy surrendered in early years
• Declining schedule: Typically decreases over 10-20 years
• Then eliminated: No charge after surrender period ends
• Example: Year 1: 100% of first year premium; Year 10: 10%; Year 15: 0%

Premium Load/Expense Charge

• Percentage of premium: Typically 5-10% of each premium payment
• Front-end load: Deducted before amount goes to cash value
• Covers: Sales commissions, underwriting costs, administration

Partial Withdrawal Fee

• Per-withdrawal charge: Some policies charge $25-50 per withdrawal
• May have free withdrawals: Some allow 1-2 free withdrawals per year

Many universal life policies offer a no-lapse guarantee rider:

• Guaranteed coverage: Policy stays in force even if cash value is zero
• Premium requirement: Must pay specified minimum premium
• Shadow account: Separate accounting to track guarantee
• Duration: May be to age 90, 100, 120, or lifetime
• Additional cost: Rider adds to policy cost
• Peace of mind: Protects against policy lapse even if interest rates drop

Example:
Policy requires $300/month minimum with NLG rider. Even if cash value drops to $0 due to low interest rates, policy stays in force as long as $300/month premiums are paid.

Partial Withdrawals

• Reduce cash value: Permanently removes money from policy
• May reduce death benefit: Depending on death benefit option
• Taxable to extent of gain: Amount exceeding basis (premiums paid) is taxable
• Surrender charges may apply: If within surrender charge period
• No repayment: Unlike loans, withdrawals are permanent

Policy Loans

• Borrow against value: Use cash value as collateral
• Interest charged: Typically 4-8% annually
• Not taxable: Loans are not taxable income
• Reduces death benefit: Outstanding loan deducted from death benefit
• Optional repayment: Can repay or let interest accumulate
• Lapse risk: If loan + interest > cash value, policy may lapse

Surrender Policy

• Complete termination: Cancel policy and receive full cash value
• Minus surrender charges: If within surrender charge period
• Taxable to extent of gain: Gain over basis is ordinary income
• No more coverage: Death benefit protection ends

A universal life policy lapses when:

• Insufficient cash value: Not enough to pay monthly COI charges
• No premium payment: And no cash value to cover charges
• Grace period expires: Typically 61 days to pay premium or add cash

Lapse Prevention

• Monitor cash value: Check statements regularly
• Maintain adequate premiums: Pay at least target premium
• No-lapse guarantee: Consider NLG rider
• Interest rate awareness: Low rates deplete cash value faster

Lapse Consequences

• Coverage ends: No more death benefit protection
• Tax liability: If cash value received exceeds premiums paid
• Surrender charges: May apply if within charge period

1. Traditional Universal Life (UL)

• Standard version: Current interest rate credited to cash value
• Interest rate risk: If rates drop, may need higher premiums
• Transparent: Clear view of all charges and credits

2. Indexed Universal Life (IUL)

• Index-linked returns: Cash value linked to stock market index (S&P 500, etc.)
• Floor: Minimum guaranteed return (typically 0% or 1%)
• Cap: Maximum return in any year (typically 10-14%)
• Participation rate: Percentage of index gain credited (e.g., 100% participation)
• No direct investment: Not invested in market, insurer credits returns based on index
• Downside protection: Cannot lose value due to market declines (floor protects)
• Upside potential: Can earn more than traditional UL in strong market years

IUL Example:

S&P 500 returns 20% in year
Cap: 12%
Participation rate: 100%
Cash value credited: 12% (capped)

S&P 500 returns -15% in year  
Floor: 0%
Cash value credited: 0% (floor protects from loss)

3. Guaranteed Universal Life (GUL)

• Low cash value: Minimal cash value accumulation
• Strong guarantees: No-lapse guarantee for life or to advanced age
• Lower premiums: Less expensive than traditional UL
• Protection focus: Designed for permanent death benefit, not savings
• Permanent term: Functions like term insurance that never expires

4. Variable Universal Life (VUL)

• Investment options: Choose from subaccounts (similar to mutual funds)
• Market risk: Cash value can decrease if investments perform poorly
• Higher potential returns: Can earn higher returns than fixed UL
• Securities product: Requires securities license to sell
• Prospectus required: Regulated as security

1. Premium flexibility: Adjust payments up, down, or skip
2. Death benefit flexibility: Can increase or decrease coverage
3. Transparent costs: Can see exactly where money goes
4. Cash value access: Loans and withdrawals available
5. Potential for higher returns: IUL offers market-linked growth
6. Lower initial cost: Can start with lower premiums than whole life
7. No-lapse guarantees: Available riders prevent unintended lapse
8. Tax advantages: Tax-deferred growth, tax-free death benefit

1. Complexity: More complicated than whole life
2. Lapse risk: Can lapse if not properly funded
3. Rising COI charges: Costs increase significantly with age
4. Interest rate risk: Low rates can deplete cash value
5. Requires monitoring: Must watch statements and cash value
6. Not guaranteed: Most features are not guaranteed (except minimums)
7. Surrender charges: Early termination can be expensive
8. Potential for inadequate funding: Minimum premiums may not sustain policy long-term

Best For:

• Flexible budgets: Income varies or may increase over time
• Adjustable needs: Death benefit needs may change
• Cost-conscious: Want to see and control costs
• Market participation: IUL for those wanting index-linked growth
• Permanent coverage on budget: GUL for affordable permanent protection

Not Ideal For:

• Set-it-and-forget-it: Those who won't monitor policy
• Maximum guarantees: Whole life offers more certainty
• Simplicity seekers: Whole life or term may be better
• Risk-averse: Variable components carry risk

• UL = flexibility + transparency + current interest rates
• Three components: Premium, COI (cost of insurance), cash value
• COI increases with age - critical to understand
• Option A: Level death benefit (face amount only)
• Option B: Increasing death benefit (face amount + cash value)
• No-lapse guarantee: Keeps policy in force even with zero cash value if minimum premium paid
• IUL features: Floor (downside protection), Cap (maximum return), Participation rate
• IUL floor typically 0%: No loss from market decline
• Policy can lapse: If cash value insufficient to cover COI charges
• Minimum vs target premium: Minimum keeps in force; target maintains to maturity
• Surrender charges: Decline over time (typically 10-20 years)
• MEC limit: Cannot overfund beyond seven-pay test
• Partial withdrawals: Reduce cash value permanently, may reduce death benefit
• Policy loans: Charged interest, reduce death benefit if unpaid