1. Introduction to Universal Life

A Universal Life (UL) contract combines life insurance with an investment product in a transparent, flexible format. The policyholder may vary the amount and timing of premiums, within some constraints. Here is how it works:

  • The premium is deposited into an account, which is used to determine the death and survival benefits.
  • The insurer credits interest to the account at regular intervals (typically monthly).
  • The account, made up of the premiums and credited interest, is subject to deductions for management expenses and for the cost of life insurance coverage.
  • The account balance or account value (AV) is the balance of funds in the account.

The account value represents the insurer’s liability, analogous to the reserve under a traditional contract.

  • Universal Life (UL) policies are sold as “permanent” life contracts (with tax advantages)
  • The AV represents the underlying value of the contract, and is used to determined the cash value

With the UL, the policyholder’s money is not associated with specific assets, they are held in “notional” accounts. Credited interest declared need not reflect actual earnings

In contrast, the Variable Universal Life (VUL), monies are held in separate accounts. Interest credited is directly associated with the yields on these funds. This is studied in Chapter 12 of DHW (but not by us).

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