UL plans are unbundled, the various components of the plan such as insurance charges and earned interest can both be isolated and quantified. Consequently, they are much easier to understand and explain than traditional bundle permanent products. Most UL policies are actually distinguished by differences in their separate components. In this article, we will discuss the cost and mortality components of Universal
1. Cost of insurance (COI)
a) Yearly renewable term (YRT)
The cost of insurance increased every year with the actual increasing mortality risk of the policyholder. These type of universal life policy fulfills very well in the early years because the cost of insurance charges are low. However, they tend to suffer in later years when the COI charges become very large.
b) Level cost of insurance
A popular alternative to the YRT is the Level COI structure where the cost of insurance is scheduled to remain constant through the duration of the policy. The main benefit of this plan is that, although cash values are lower in the early policy years, the policy reforms are well clients want safe for retirement. Since UL contracts are long-term protection vehicles, the later higher values are desirable.
c) Hybrid cost of insurance
They have high early policy values due to the lower initial COI, but they do not suffer from severe erosion of fund values later in the policy since ultimate risk costs are capped. Other contracts allow the client to essentially select the mortality component from their term insurance such as term 5, 10, 20, 100. . . and then shape a UL contract around these COI rates, complete with tax-sheltered fund.
a) Guaranteed mortality
A popular Universal life policy where the cost of mortality rate of insurance is guaranteed through the duration of the policy. The premium is higher than non guaranteed counter part. If they have purchased a UL plan with YRT COI, the amount deducted every year will be exactly as specified in the contract.
b) Non guaranteed mortality
Since the insurance company is essentially passing the mortal risk on to the client, the initial mortality costs and quite possibly, the future costs can be substantially lower than those charged in a guaranteed contract. This type of plan's advantages is the significant upside potential in the way of reduced mortality costs, but the downside risk is limited by way of the guaranteed maximum costs.
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