Universal Life Insurance: Mechanics and Pricing

UL Mechanics

Universal life (UL) insurance maintains an account value (AV) that changes each period. The account value update is: AV_{t+1} = (AV_t + P_t - e_t) * (1 + i_c) minus COI_t, where P_t is the premium paid, e_t is the expense charge, i_c is the credited interest rate, and COI_t is the cost of insurance charge. The COI equals the net amount at risk (death benefit minus account value) times the mortality charge rate. UL policies offer premium flexibility within limits set by no-lapse guarantees and tax qualification requirements.

Death Benefit Options

Option A (level death benefit) provides a constant total death benefit, so the net amount at risk decreases as the account value grows. Option B (level net amount at risk) increases the total death benefit by the account value growth, keeping the net amount at risk constant. Option B is more expensive due to the larger COI charge. Exam LTAM tests account value projections, COI calculations, and the impact of different crediting rates and expense structures on UL policy performance.