Question

Megan, age 32, is married and has a son, age 1. She recently purchased a cash-value life insurance policy that has the following characteristics: •The frequency and amount of premium payments are flexible.•The insurance and saving components are separate.•The interest rate credited to the policy is tied to current market conditions, but the policy guarantees a minimum interest rate.•The policy can be purchased with a level death benefit or an increasing death benefit.Based on these characteristics, what type of life insurance did Megan purchase? Explain your answer.

Answer 1

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Answer:

Based on the characteristics stated in the question, Mrs. M purchased universal life insurance policy A universal life insurance policy is a one, which has flexible premium and which unbundles the protection and savings components. The characteristics of the policy are as follows: • The policyholder determines the amount of premium payable and its frequency except the first premium. The policies have a target premium, which should be paid to keep the policy enforced for a certain number of years. Most policies have no lapse guarantee, which assures the policy to be in force, if the minimum premium is paid. • The insurance and savings component are kept separately. An annual statement is provided that shows the premium paid towards the insurance cover and towards the cash value benefits. The statement also shows the interest credited on the cash value and the mortality • Interest rate is guaranteed at a minimum rate which may be as low as 3%. This is as per the contractual agreement of the insurance policy. However, the actual rate is higher and it depends on the market conditions and company experiences. • The back-end surrender charges are charged by the insurers to cover administrative charges. This is usually between 5 to 10%. These charges are usually higher in the initial years. However, the annual charges decline over the years. The surrender charges are normally not applicable for polices, who complete the tenure of 10 years or more.