universal life insurance

Question 1

Whole life insurance generally offers a fixed death benefit and guaranteed minimum cash
surrender values (CSV) in exchange for fixed premiums.

While adjustable whole life insurance has a death benefit and premiums that may increase or decrease periodically, these changes are initiated by the insurance company, after they compare their actual experience with mortality rates, investment returns and expenses against their previous projections. The policyholder had no control over these changes.

Question 2

With term insurance and guaranteed whole life insurance, the three pricing factors ( ) are said to be bundled together, and they are fixed for the life of
the contract.
The policyholder typically does not know what portion of his premium goes towards mortality costs or expenses

Answer 2

mortality costs,
investment returns and
expenses

Question 3

With UL policies, the three pricing factors are ___________and they are not necessarily __________.

Answer 3

unbundled
fixed

Question 4

UL policies disclose how the mortality costs are applied, how the expense charges are calculated,
and any guaranteed investment returns that apply to the policy.
This gives the policyholder a better understanding of how the cost of insurance and the expenses vary over time, and how they can impact the cash value of the policy.
The cash value (CV) of a UL policy is ________________. It may or may not be equal to the cash surrender value
(CSV) of the policy, depending on whether or not surrender charges apply

Answer 4

the value of the investment account(s) within the policy

Question 5

Whenever the policyholder pays a premium into a UL policy, the insurance company passes a
percentage of that premium on to the provincial or territorial government, in the form of a __________

it is charged on the entire premium, not just the portion that covers the cost of insurance

The remainder of the premium goes into the policy’s ___________

Answer 5

premium tax

investment account(s)

Question 6

For a UL policy, the insurance
company deducts these mortality costs from the policy’s _______________ . The policyholder has
some choice in how these mortality costs are calculated,

Answer 6

investment account

Question 7

The insurance company also deducts its expenses from the investment account. These include,
for example, _____________________.

Depending on the insurance company, these expenses might be charged as a percentage of the annual premium, or as a flat monthly fee.

Because of the complexity and flexibility of UL insurance, the administrative expenses tend to be ____ than for other forms of permanent insurance.

Answer 7

the cost of selling,
underwriting and issuing policies,
income taxes,
the cost of investigating and paying claims, and
the profits sought by shareholders

higher

Question 8

Investment income accumulates within the policy______________ as long as certain limits set by the Income Tax Act are not exceeded,

Answer 8

tax-free

Question 9

Universal life (UL) insurance can be highly customized, both ________ and _____________.

The flexibility can be seen in the following:
___
___
___

Answer 9

at the time of issue
once coverage is already in place

▪ Timing and amount of premiums;
▪ Face amount;
▪ Life/lives insured

Question 10

The suggested minimum premiums should be enough to cover the premium tax and the insurance
company’s mortality costs and administrative expenses for that policy.
The minimum premiums are designed to __________________, but they are not enough to build up the ____________ within the policy.

If the policyholder only pays the minimum amount, the policy is said to be a ___________ UL policy.

Answer 10

keep the policy in force until age 100

investment account

minimally funded

Question 11

The policyholder can choose to pay an amount that is higher than the minimum premiums when
the policy is first issued, to take advantage of the tax-sheltered growth that can happen in the UL
policy and to build up the policy’s ____.

The policyholder can increase the annual or monthly premiums in the future, but most policies
place a _______________, to ensure the policy maintains its tax-exempt status.

If the policyholder is always paying the maximum amount, the policy is said to be a “maximum-funded” UL policy.
The policyholder can also deposit lump-sum premiums at any time, again subject to the minimum
and maximum amounts specified in the policy.
The policyholder can reduce or even stop the premiums for a period of time, as long as the
___________________________________

Answer 11

cash value

maximum on the premiums

investment account can support the insurance company’s mortality and expense deductions

Question 12

A UL policy will remain in force as long as the investment account value is sufficient to support the
mortality and expense deductions. There are several key factors that could result in an insufficient
account value, which would increase the risk of the policy lapsing:
____
____
____
____

Answer 12

▪ The policy was always minimally funded;
▪ The policyholder made withdrawals from the policy;
▪ The policyholder decreased or stopped premium payments;
▪ The investment returns were lower than anticipated, or possibly even negative

Question 13

Elaine is pregnant and she plans to take a one-year maternity leave from
her job, which will result in decreased income for that period. To ease the
pressure on her cash flow, Elaine can reduce her premiums, or even stop
paying premiums for a period of time. If she stops the premiums entirely, the
policy would likely lapse after about eight or nine months ($2,900 ÷ $325),
because the account value would be exhausted by the mortality and expense
deductions

Answer 13

In the previous Chapter, an example showed a term policy with a modal factor
of 0.088, such that an annual premium of $956 became a monthly premium
of $84.12, calculated as ($956 x 0.088). Over the course of one year, the total
premiums would be $1009.56, calculated as ($84.12 × 12), which is 6% higher
than the quoted premium of $956.
For the majority of universal life policies:
Modal factor for monthly payments is 0.0833, calculated as (1 ÷ 12).
Modal factor for semi-annual policy is 0.50, calculated as (1 ÷ 2).
In this case, the annual and annualized premiums are the same

Question 14

The policyholder must select a face amount when first acquiring the UL policy, subject to any
minimums or maximums imposed by the issuing insurance company.

If the policyholder needs additional coverage in the future, he can add that additional coverage to the existing policy on an ________ basis;

he does not have to take out a new policy. However, any increase in the face amount will require the insured person to provide evidence of insurability (i.e., meet certain standards set by the insurance company to prove that he does not pose a significant risk to that
company), unless the policy includes a rider for a guaranteed insurability benefit.

Answer 14

attained age

Richard and Maria, ages 38 and 42, already have two children, ages 15 and 17. Richard has a $500,000 UL policy on his own life. Maria is employed and
earns a good salary, and they have no major debts. Richard bought a UL policy a few years ago to ensure that, if he died, Maria would have enough money to
raise the children right through their post-secondary education. Much to their surprise, Richard and Maria have just learned that Maria is pregnant with twins.
Richard decided to increase his UL coverage by $500,000. He was able to do so within his existing UL policy, after providing proof of insurability. If their cash flow is limited while Maria is on maternity leave and there is sufficient cash value within the policy, Richard may be able to have this increased coverage without increasing his premiums for the time being, as discussed shortly

Question 15

The policyholder can also decrease the amount of coverage. To minimize administrative expenses,
insurance companies will usually restrict increases or decreases to a minimum amount (e.g., increase of at least $25,000 or decrease of at least $10,000).
Changing the face amount can impact how quickly the cash value of the policy grows, because the
__________ are directly linked to the face amount.

If the face amount increases, the insurance
company will increase its mortality cost deductions from the policy’s investment account. Unless
the policyholder compensates by increasing premiums, this will leave a smaller amount for investment purposes and may even erode the policy’s cash value.
Conversely, if the face amount decreases, the insurance company will decrease its mortality cost
deductions and, if the policyholder does not change his premiums, this means more money will be
available for investment, which should result in a higher cash value

Answer 15

mortality costs

Question 16

One universal life (UL) policy can be used to insure multiple lives, either on a joint-life basis, a
single-life basis or, depending on the insurance company, sometimes both

Answer 16

Joe bought a UL policy that included $500,000 of joint-last-to-die coverage on the lives of himself and his wife, Sherry, and another $1,000,000 in individual coverage on his own life. The joint coverage is payable to the estate of the last to die, and is intended to be used to offset the tax liability that will be triggered upon the last of their deaths on certain estate assets they want to leave to their
children.

The individual coverage is payable to Sherry upon Joe’s death, and is intended to help replace the family’s lost income if Joe dies first

Question 17

UL policies may allow the policyholder to add or even substitute a new life insured under the policy,
as long as the new person can provide evidence of insurability

Answer 17

Sherry is no longer able to care for their young children because she was paralyzed in an accident. Joe’s sister, Deborah, has moved in with them and she has become an integral and essential part of the family. Joe decided
to add Deborah as a new single life insured under his existing UL policy.
Deborah had to provide proof of insurability before Joe could add her to the policy

Question 18

The mortality cost deductions that the insurance company draws from a UL policy’s investment
account are a reflection of the net amount at risk and the mortality costing method used, as discussed below in this order:
▪ Net amount at risk (NAAR);
▪ Yearly renewable term (YRT);
▪ Level cost of insurance (LCOI);
▪ Choosing between YRT and LCOI costing;
▪ Guaranteed vs. adjustable mortality deductions

Question 19

For a UL policy, the mortality deductions are based on the net amount at risk (NAAR), which is
calculated as:

Answer 19

NAAR = death benefit – the investment account value

“death benefit” included in this formula refers to the full amount payable upon death,
which could be more than the original face amount of the policy.

Pratik owns a UL policy with a death benefit of $500,000 and an account value of $128,000. The current NAAR of his policy is $372,000, calculated as
($500,000 – $128,000).

Question 20

Yearly renewable term (YRT)
Mortality costing, or cost of insurance (COI), is usually expressed as a dollar amount per $1,000 of risk, or in the case of a UL policy, per $1,000 of the NAAR.

Answer 20

EXAMPLE (CONT.):
Suppose that for the current policy year, Pratik’s policy had a COI of $18.57.
The insurance company would make a mortality deduction of $6,908 from his account, calculated as ($18.57 × $372,000 ÷ $1,000)

Question 21

For a UL policy, the policyholder can choose one of two ways of applying the risk of death to the
NAAR. The first is based on yearly renewable term insurance costing.

So, for UL insurance based on YRT, the cost per $1,000 at risk generally increases each year because the risk of death tends to increase with age (with the exception of the first few years
of life).

Answer 21

Recall that, for term insurance, the mortality cost for a period of time is equal to the death benefit
(i.e., the amount at risk) multiplied by the probability of death, or the risk that the life insured will
die during that period.
Yearly renewable term (YRT) is one-year term insurance that renews at the end of every policy year. The annual YRT premium for a specific year is based on the life insured’s risk of death for that year.

Question 22

Agents should consider the client’s goals when helping them choose between YRT and LCOI costing:
▪ If a client is looking for greater short-term policy fund values, he would likely be better off choosing
the YRT costing option, at least initially;
▪ If a client is looking for longer-term policy values, he would likely be better off choosing the LCOI
costing option, because it locks him into a level rate for life.

Answer 22

Some policies allow the policyholder to switch from YRT costing to LCOI costing after the policy
is issued, but the LCOI rates will be based on the age of the life insured at the time of the switch.
The policyholder generally is not permitted to switch from LCOI to YRT costing after the policy
is issued