South Carolina Life Insurance Practice Exam

What typically happens to the premium of a universal life insurance policy as the insured ages?

1. The premium increases significantly

2. The premium remains constant

3. The premium decreases substantially

4. The premium may vary based on cash value

The correct answer is: The premium may vary based on cash value

In a universal life insurance policy, the premium is flexible and can vary throughout the life of the policy. As the insured ages, the cost of insurance (which is a key factor in determining the premium) typically increases. However, policyholders have the option to adjust their premium payments within the guidelines of the policy. One significant aspect of universal life insurance is the relationship between premiums, the cost of insurance, and the policy's cash value. The premium paid can often be allocated between covering the cost of insurance and contributing to the cash value of the policy. If the cash value accumulates, it can be used to help pay premiums in later years, potentially leading to lower out-of-pocket costs for the policy owner. Additionally, if the policyholder decides to decrease premium payments or if the policy is designed in a way that premiums adjust based on cash value growth, this can further influence premium variability. This flexibility allows the policy to adjust according to the policyholder's financial situation and the performance of the cash value component, providing a significant level of adaptability as the insured ages.