Cost Of Insurance

Each month, a universal life policy's cash value is reduced by the MONTHLY DEDUCTION, which consists of:

1. A.Only the sales load on new premiumsWrong. Premium loads apply to payments; the monthly deduction hits the account.
2. B.The full annual premium divided by twelveWrong-but-tempting. Premiums are INFLOWS the owner controls - deductions are the insurer's charges.
3. C.The cost of insurance for the net amount at risk plus expense chargesCorrect. Mortality and expense charges constitute the monthly deduction.
4. D.State premium taxes on the death benefitWrong. Premium taxes attach to premiums, and never to death benefits.

Why: UL mechanics deduct mortality (COI) and expense charges monthly from the account value, crediting interest on the remainder; premium payments are separate inflows, making the deduction relentless regardless of payment activity. Citation: universal life monthly processing. Takeaway: COI + expenses leave every month - fund the account or watch it drain.

Eight years after issue, Wrenfield Life raises the CURRENT cost of insurance rates on a block of universal life policies, citing worse than expected mortality experience across that block. Torvald, whose health has deteriorated badly since issue, receives a notice and assumes he was singled out. Which statement correctly describes the insurer authority here?

1. A.The insurer may raise current cost of insurance rates but never above the guaranteed maximum scale, and only on a class basis, not because of one insured deteriorating healthCorrect. Current rates may move within the guaranteed maximum ceiling and must be changed uniformly by class.
2. B.The insurer may reassess each insured individually at any time and charge a rate reflecting current healthIndividual re-rating after issue would destroy the value of the coverage and is not permitted. Changes must be class based.
3. C.The insurer may raise the rate to any level it can actuarially justify, including above the guaranteed maximum scaleThe guaranteed maximum scale in the contract is an absolute ceiling on what may be charged.
4. D.The insurer may never change cost of insurance rates once a universal life policy is issuedUniversal life expressly contemplates current rates that can move. Only the guaranteed maximum is fixed.

Why: A universal life policy contains two cost of insurance scales: the CURRENT rates the insurer actually charges and the GUARANTEED MAXIMUM rates stated in the contract. The insurer may raise current rates, but two constraints apply. It can never charge above the guaranteed maximum scale, and it must apply any change on a CLASS basis, using criteria specified in the contract such as issue age, underwriting class and duration. It may not single out an individual policyholder because his personal health deteriorated after issue, which is the whole point of having bought coverage. Torvald deteriorating health is irrelevant to what he can be charged.