Question

Amanda owns a $200,000 Universal Life policy with a level death benefit plus account value that is paid for using the level cost of insurance premium. Amanda is overfunding the premium and investing the excess amount in a Canadian Equity Fund Index offered by the policy. Amanda has just received her quarterly statement and learns that the investment value has shrunk from $24,000 to $19,000. Given this scenario, which of the following statements is most correct?

A. Amanda's death benefit will increase due to the overfunded premium.
B. Amanda's investment losses will not impact the policy's cash value.
C. The level cost of insurance premium is not affected by the investment performance.
D. Amanda's death benefit is unaffected by changes in the investment account.

Answer 1

C. The level cost of insurance premium is not affected by the investment performance.

The level cost of insurance premium within Amanda's Universal Life insurance policy remains unchanged despite the investment performance. The recent loss in the value of the Canadian Equity Fund Index will decrease the policy's cash value but does not directly affect the cost of the premium or the base death benefit.

Step-by-step explanation:

Given the scenario where Amanda's investment in a Canadian Equity Fund Index through her Universal Life insurance policy has decreased in value, the most correct statement is that C. The level cost of insurance premium is not affected by the investment performance. This means that irrespective of the fund's performance, the cost of the insurance component remains the same. It's also important to note that while Amanda is overfunding her premiums which increases her cash value, the recent investment loss will decrease the total cash value of the policy. The death benefit in a policy structured as level death benefit plus account value could potentially decrease if the cash value diminishes significantly. However, the essence of a Universal Life policy is that the death benefit is separated from the investment component, leaving the pure insurance cost unaffected by investment performance.