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7. Understanding universal life insurance Universal Iife insurance combines elements from term life insurance and whole Iife insurance. Term policies provide a death benefit savings component, whole life policies provide a death benefit savings component, and universal policies provide a death benefit savings component. To understand how universal premiums are allocated, consider the following example, Shen is a 43-year-old lawyer who has taken out a universal ufe insurance policy to protect his two children (ages 14 and 13 ) in the event of death. Each year, Shen chooses how much would like to contribute to the policy, as shown by the first row of the table below. The insurance company subtracts from this an administrative fee along with the cost of the death beneft (the portion of the policy) then puts the remainder into the cash value (or portion of the policy. This money earns interest at a rate of return. Based on the given information, calculate the amount that is added to the cash value portion of the policy in each of the first three years. The cost of the death benefit portion of universal policies is only foxed for certain periods and rises with age, as is the case with life insurance policies. Suppose that in the 8th year of his policy, his cost of death beneft has risen substantially. At the same time, he is paying college tuition and currently cannot afford to pay his life insurance premium. True or False: Under the terms of a standard universal policy, if Shen stops paying his premiums, then his policy will be cancelled and the value of the cash portion will be paid out to him immediately. True False

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