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Unformatted text preview: a policy Accumulate at interest Offset premiums (pay premiums due) Purchase one-year term insurance Policy Loans Can borrow against the cash value of the
policy Then owes the principal plus the interest, if
the policyholder dies prior to repaying the
loan, the loan balance reduces the death
benefit Why does a policyholder have to pay interest
on his/her own money?
on Automatic premium loan provision (prevent
lapse) Settlement Options How death benefits are paid: Cash (lump sum)
Fixed period (annuity certain)
Fixed amount (annuity certain)
Life Income Options (with or without guarantee) Universal Life Insurance Product Innovation: Universal Life
Universal Life Policies
Provide permanent death protection and
Differs from traditional whole life policies:
Differs offer greater flexibility with premium payments the cash value varies explicitly over time
based on premium payments, expense and
mortality charges, and credited interest
mortality Product Innovation: Universal Life Premium flexibility No fixed premium schedule Cash value is not fixed in advance Cash Value Accumulation The cash value of a universal life policy varies over
time (whole life has predetermined rate)
Death benefit and savings accumulation are unbundled
Usually guarantee a minimum interest rate
Danger of projections (vanishing premium concept) Cash Value Accumulation: Universal Life
Cash Value +
Premium payments at beginning of period Mortality charge at beginning of period Expense charge at beginning of period +
Interest credited at end of period =
Cash value at end of period Cash Value with Univ. Life Concept Check: Other things being equal, explain how each of the following would be likely to affect the
growth of a universal life policy’s cash value. (a) The policyholder reduces the annual premium
payment by 50 percent after five years.
(b) Market interest rates are stable for five years and
then decline sharply a...
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