Understand the cashflows and calculate account values and benefits under Type A and Type B Universal Life policies.

A Universal Life policy is a savings bucket with a one-year term rider stapled on top. You credit interest on the bucket, deduct insurance and expense charges, and pay a death benefit that either stays level or rises with the bucket. Type A keeps the death benefit level. Type B lets it grow with the account value.

Picture a savings account with an attached term policy. You deposit a premium. The insurer skims an expense load off the deposit. The remainder earns interest at the credited rate $i_c$. At each policy anniversary the insurer deducts a Cost of Insurance (CoI) charge for the year's mortality coverage. What survives that round of charges is your account value $A{V}_t$, also called the policyholder fund.

The policyholder owns the account value. On surrender the policyholder receives $A{V}_t$ net of a surrender charge $S{C}_t$. On death the beneficiary receives a death benefit $D{B}_t$ that depends on the policy type.

For policy year $t$, starting from $A{V}_{t-1}$, the contractual flow is:

Common mistakes

• Flipping Type A and Type B NAR. For Type A, NAR is $FA-AV$ and shrinks as the fund grows. For Type B, NAR equals the full face amount in every year. Mixing the two is the single most common trap.
• Dropping the $1/(1+i_q)$ discount in CoI. $Co{I}_t=q^{\ast }\cdot NAR/(1+i_q)$, not $q^{\ast }\cdot NAR$. The discount factor reflects that the expected claim is paid at year end. Answer choices typically include the undiscounted version as a distractor.
• Using best-estimate $q$ instead of contract $q^{\ast }$. UL contracts charge mortality at a stated rate often higher than expected actual. The exam expects $q^{\ast }$.

Bottom line

• Account value recursion: $A{V}_t=(A{V}_{t-1}+P_t-E_t)(1+i_c)-Co{I}_t$; credit interest after expense, before deducting CoI.
• Type A death benefit is level at Face Amount, so NAR = FA minus AV shrinks as the fund grows.
• Type B death benefit equals FA + AV, so NAR = FA, constant in every year.
• CoI charge: $Co{I}_t=q_{x+t-1}^{\ast }\cdot NA{R}_t/(1+i_q)$; $q^{\ast }$ is the contract mortality rate, usually higher than expected actual mortality.

Exam shortcut

For Type B questions the CoI is $q_{x+t-1}^{\ast }\cdot FA/(1+i_q)$ in every year. Pre-compute the constant $FA/(1+i_q)$ once, then just multiply by $q^{\ast }$ each duration. DECISION: AV growing through the years. Type A NAR shrinks and CoI falls even at flat $q^{\ast }$. Type B NAR is fixed and CoI moves only with $q^{\ast }$. If a question asks "which type's CoI changes year to year only because of mortality," answer Type B.

The full lesson (about 7,274 words, 48 min read) adds 5 worked examples, all 14 common mistakes, a self-check, free in the app.

Learning objectives

• 6a

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