7. Understanding universal life insurance Aa Aa Universal life insurance combines elements from term and whole life insurance. Term policies provide a death benefit savings component, whole life policies provide a death benefit savings component, and universal policies provide a death benefit savings component. To understand how universal premiums are allocated, consider the following example. Steve is a 44-year-old lawyer who has taken out a universal life insurance policy to protect his two children (ages 15 and 16) in the event of his death. Each year, Steve chooses how much he would like to contribute to the policy, as shown by the first row of the table below. The insurance company subtracts from this an administrative fee along with the cost of the death benefit (the portion of the policy) then puts the remainder into the cash value (or portion of the policy. This money earns interest at a rate of return. Based on the given information, calculate the amount that is added to the cash value portion of the policy in each of the first three years. Premium (annual contribution) Administrative fee Cost of death benefit Amount added to cash value Year 1 $2,792 $85 $110 Year 2 $2,023 $85 $110 Year 3 $1,511 $85 $110 The cost of the death benefit portion of universal policies is only fixed for certain periods and rises with age, as is the case with life insurance policies. Suppose that in the 7th year of his policy, his cost of death benefit has risen substantially. At the same time, he is paying college tuition and currently cannot afford to pay his life insurance premium. True or False: Under the terms of a standard universal policy, if Steve stops paying his premiums, then his policy will be cancelled and the value of the cash portion will be paid out to him immediately. True False