Universal Life insurance & Illustrations

inflexible

premiums and amount of death protection are fixed over time

Whole life cash value accumulation set based on constant...

-Death benefits -Premium payments -guaranteed rate of return

Outflows

-Mortality expenses -Expense charges

Whole Life

-Permanent death protection -Creation of cash value -Fixed premium/year -Fixed amount of death protection -Guaranteed rate of return on cash value

Universal Life

-Permanent death protection -Creation of cash value -Variable premium payment allowed -Death protection can be changed -Rates of return usually guaranteed; insurers often offer higher rates

Lapse rates are often high, as new buyers often do not continue to renew over time

-Reduces returns for existing policyholders -Increases front end loading if insurer has high lapse rate.

Inflows

-Variable interest rates credited on cash value -Premiums paid to cash value accounts

Favorable tax treatment

1. Death proceeds are not taxable as income to beneficiary 2. No tax liability of annual increase in cash value while the policy is in force 3. If policy is surrendered, policyholder pays tax on (cash value - sum of premiums [net of dividends]) 4. Unfortunately, premiums paid for life insurance are NOT tax deductible for policyholder in the U.S. - Unlike many other countries

UL cash value growth varies depending on

Inflows and outflows