Universal life insurance combines elements from term life insurance and whole life insurance. Term policies provide a death benefitand no savings component, whole life policies provide a death benefitbundled with a savings component, and universal policies provide a death benefitand a separate savings component. To understand how universal premiums are allocated, consider the following example.

Edison is a 37-year-old lawyer who has taken out a universal life insurance policy to protect his two children (ages 8 and 8) in the event of death. Each year, Edison 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	Year 2	Year 3
Premium (annual contribution)	$2,587	$2,062	$1,645
Administrative fee	$95	$95	$95
Cost of death benefit	$130	$130	$130
Amount added to cash value	$	$	$

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 14th year of his policy, his cost of death benefit has risen substantially. At the same time, he is helping to pay his mothers 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 Edison 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

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