Choosing the Right Universal Life Policy for Your Client

Understanding the Key Components of Universal Life Policies

The course, we discussed the flexibility of a Universal Life policy and the choices that a consumer has in death benefit options (4), mortality charges (level cost of insurance or yearly renewable cost of insurance), and investments. Please refer to the text, presentation slides and other published materials for a review of the key features of Universal Life policies A client of yours would like your assistance in selecting a Universal Life policy to meet current insurance needs of family protection in the event of an untimely death.

Client Profile
• Female, age 35, non-smoker
• Initial Face Amount: $100,000
• Amount she is willing to contribute: $1200 paid at the beginning of each policy year
• A conservative investor who believes that an annual investment return of 3% per is reasonable over the long term.

Source of Information
You have accessed the illustration software from BMO Insurance Company and secured illustrations of three versions of a Universal Life policy you intend to present to her in your next meeting. These versions are:
1. Level Death Benefit, Yearly Renewable cost of insurance, 3% annual investment return
2. Level death benefit plus Account Value, Yearly Renewable cost of insurance, 3% annual investment return.
3. Level Death Benefit plus Account Value, Level cost of insurance, 3% annual investment return.

The illustrations summarizing the values of these three versions are presented on Appendix ‘A’ You should print these out (3 pages) and refer to them when answering the questions. The Assignment The purpose of the assignment is to test your understanding on how the different choices the client makes on death benefit options and the mortality charges can impact the policy values You will be asked 10 multiple choice questions about differences in the plans as they relate to death benefit amounts and account values.

1. Print out the three Universal Life illustrations so you will be able to refer to them in your preparation and while answering the test questions. Each illustration is attached and is just one page in length.
2. Be sure you understand how Universal life works and its key components (death benefit options, cost of insurance options, NAAR, fund values /account values, cash surrender values)
3. Select two or three ages (for example ages 50, 65, 85) and compare the values in all three illustrations. Be able to explain why some are higher or lower.
4. Review the trends in the changes in the Fund Values (Account Values) and Death Benefits for the entire duration of the various plans and be able to explain the reasons for the differences.
5. Be prepared to recommend the most appropriate option for your client based on her objectives and priorities.

 

1.    What are your observations about the Account Values (Fund Value) and Death Benefits in these two versions? (2 marks)

2.    What would account for the differences? (2 marks)

3.    What is the Net Amount At Risk (NAAR) at age 65 under each of these versions? (2 marks)

 

1.    What are your observations about the Account Values and Death Benefits in these two versions? (2 marks)

2.    What would account for the differences? (2 marks)

3.    At age 85, the Account Values of Version 2 start declining when compared to Version 3. What would be the reason for this decline? (1 mark)

4.    If she selects Version 3 and decides to surrender the policy at age 70, how much of the amount she receives will be taxable assuming her ACB is $40,000? (2 marks)

1.    In what ways can she increase the Account Values in all these plans? (2 marks)