A Universal Life policy is sometimes referred to as an unbundled Life Policy because the owner can see the interest earned, cost of insurance, and the:

 Options:

a) inherent risk b) commission risk c) inflation factor d) expense charges

The Correct Answer Is:

d) expense charges

Explanation of the correct answer (d) expense charges:

➦ The universal life insurance policy, also known as the unbundled life insurance policy, aims to separate various components of the policy, making it possible for the policyowner to view each of these components separately.

➦ Expense charges are one of the key components that the policyowner is able to see as part of the policy.

➦ The costs associated with administering and maintaining Universal Life policies are reflected in expense charges.

➦ These charges cover the insurer’s marketing, underwriting, policy administration, and agent commissions.

➦ These charges directly affect the policy’s cash value, so the policyowner can see them clearly.

➦ When expenses are deducted from a policy’s cash value, they reduce the amount of money available for investment, affecting its performance and growth.

➦ To understand the impact of these charges and to be aware of changes in the underlying investment, policyowners should carefully review their policies.

➦ It is also important for policyowners to consult their financial advisor about possible strategies for reducing these charges.

Now, let’s explain why the other options are not correct:

a) Inherent risk:

➦ The inherent risk of Universal Life policies refers to the inherent risk associated with the underlying investments or sub-accounts within the policy.

➦ Although policy owners have control over how they allocate their cash value among different investment options, inherent risk is not usually a component that is explicitly highlighted to the policyowner.

➦ Generally, it is based on the performance of the chosen investments and the market risks that are associated with them.

b) Commission risk:

➦ A commission risk is a risk in which the insurance agent or advisor may earn money from the sale of a policy as a result of it.

➦ It is important to note that commissions are an important part of selling insurance policies.

➦ However, in a Universal Life policy, commissions are not normally itemized or clearly visible to the policyholder.

➦ Commissions are generally paid by the insurance company from their earnings, not by the policyholder.

c) Inflation factor:

➦ Universal Life policies do not typically disclose the inflation factor to the policyholder or unbundled it.

➦ It is important to note that inflation, although it is a broader economic factor that impacts the value of money over time, is not a line item a policyowner can view separately.

➦ Inflation is a broader economic factor that impacts the value of money over time.

Conclusion:

➦ In summary, a Universal Life policy is referred to as an unbundled policy because it breaks down various components for transparency, and expense charges are one of these components that the policyowner can easily see, so that is why it is called an unbundled policy.

➦ Several of the other options (a) inherent risk, (b) commission risk, and (c) inflation factor are not usually itemized or separately visible in a policy, making them incorrect choices.

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