A Universal Life policy is sometimes referred to as an unbundled Life Policy because the owner can see the interest earned, cost of insurance, and the
inherent risk
commission rate
inflation factor
expense charges
The correct answer and explanation is :
The correct answer is expense charges.
Explanation:
A Universal Life (UL) insurance policy is often called an unbundled life policy because it transparently separates its three main components:
- Interest Earned – The policy accumulates cash value based on the credited interest rate, which varies depending on the insurer’s declared rate or an external index.
- Cost of Insurance (COI) – This represents the actual charge for providing the death benefit, which increases as the insured ages.
- Expense Charges – These include administrative fees, policy fees, and other costs that the insurance company deducts for managing the policy.
Unlike Whole Life insurance, where costs and benefits are bundled together in a fixed structure, a UL policy gives policyholders insight into and control over these separate elements. Because these costs are unbundled and explicitly stated, policyholders can see exactly how much they are paying for insurance protection versus how much is being allocated to cash value accumulation.
Why Expense Charges is the Correct Answer:
- Inherent Risk is incorrect because UL policies do carry risks, such as fluctuating interest rates and rising COI, but these are not explicitly broken out as a fee in the policy statement.
- Commission Rate is incorrect because while agents earn commissions, this is not an ongoing charge that the policyholder can see in the unbundled structure.
- Inflation Factor is incorrect because inflation may indirectly impact policy performance but is not a directly stated expense.
By providing transparency, expense charges help policyholders understand the true cost of their policy and make informed decisions about premium payments and withdrawals.