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7. Understanding universal life insurance Universal life insurance combines elements from term life Insurance and whole life insurance. Term polices 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 Shen is a 45-year-old lawyer who has taken out a universal life insurance policy to protect his two children (ages 16 and 14) in the event of death. Each year, Shen chooses how much 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. Year 1 $2,508 Year 2 $2,141 Year 3 $1,727 $85 585 $85 Premium (annual contribution) Administrative fee Cost of death benefit Amount added to cash value 5140 $140 $140 Witte 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 Insurance policies. Suppose that in the 6th year of his policy, his cost of death benefit has risen substantially. At the same time, he is helping to pay his mother's medical expenses after a major surgery and currently cannot afford to pay his life insurance premium True or False: Under the terms of a standard universal policy, if Shen stops paying his premiums, then the administrative fee and cost of death benent will be deducted from the savings portion of his policy (assuming sufficient cash value accumulation) and the policy will remain active