Which of the following statements regarding universal life insurance is true? Select one:
- a. Because they are not reported separately, elements of the policy such as interest credits, mortality charges, and death benefits are difficult to track
- b. Universal life allows policyowners to participate in favorable investment, mortality and expense experience of the company.
- c. Annual increases in cash value are taxable due to the unique nature of the universal life contract
- d. Because universal life is a current-assumption policy universal life is a security and a prospectus must be provided before each sale.
The correct answer and explanation is:
The correct answer is:
b. Universal life allows policyowners to participate in favorable investment, mortality, and expense experience of the company.
Explanation:
Universal life (UL) insurance is a type of permanent life insurance that offers policyowners flexibility in premium payments and death benefits. It is designed to provide a combination of life insurance protection and cash value accumulation.
One of the key features of universal life insurance is that policyowners benefit from favorable financial conditions within the insurance company. The insurer credits interest to the policy’s cash value, and this rate may vary depending on the company’s investment performance. Additionally, if the company experiences lower mortality costs or administrative expenses than anticipated, the savings may be passed on to policyowners in the form of reduced charges or higher interest credits.
The other answer choices are incorrect for the following reasons:
- Option A is incorrect because UL policies clearly report individual elements such as interest credits, mortality charges, and expenses. Policyowners receive regular statements detailing these components.
- Option C is incorrect because, under current tax laws, cash value accumulation in a universal life policy grows tax-deferred, meaning that gains are not taxed unless withdrawn.
- Option D is incorrect because universal life is not classified as a security; therefore, it does not require a prospectus before being sold. Only variable universal life insurance (VUL) policies, which involve investment in securities, require a prospectus.
Universal life insurance is a suitable option for those who seek flexibility in premiums and death benefits while accumulating tax-deferred cash value over time.
