Use this Universal Life Insurance Cost Calculator to estimate the required annual premium needed to fund your desired death benefit (Face Amount) and achieve a specific cash value target over a defined policy duration, factoring in the policy’s mortality, expenses, and expected interest credit.
Universal Life Insurance Cost Calculator
Detailed Calculation Steps:
Universal Life Insurance Cost Calculator Formula
The calculation below is a simplified model to estimate the required level premium by covering the net cost (Mortality & Expenses minus Interest Gains) and funding the Target Cash Value (TCV) over the policy duration.
2. Annual Interest Gain: $G_{CV} = \text{TCV} \times (\text{Interest Rate} / 100)$
3. Net Annual Policy Cost: $C_{Net} = \text{max}(0, C_{COI} – G_{CV})$
4. Annual TCV Funding (Deposit): $D_{CV} = \text{TCV} / \text{Years}$
5. Estimated Annual Premium: $P = C_{Net} + D_{CV}$
Variables
- Policy Face Amount: The stated death benefit paid upon the insured’s death. This directly influences the Cost of Insurance (COI).
- Policy Duration (Years): The time period used for projecting the policy’s cost and cash value accumulation.
- Annual M&E Cost Factor: The combined annual percentage rate of mortality charges and administrative expenses applied to the policy’s net amount at risk.
- Expected Annual Interest Rate: The rate at which the policy’s cash value is expected to grow, offsetting the cost of insurance.
- Target Cash Value: The specific cash value balance the policyholder aims to achieve by the end of the duration.
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What is Universal Life Insurance Cost?
Universal Life (UL) Insurance is a permanent life insurance policy characterized by flexible premiums, flexible death benefits, and an investment savings component (cash value). Unlike term life, UL offers coverage for life, provided the cash value is sufficient to cover the monthly policy charges. The cost of a UL policy is highly dynamic because the monthly premium is not fixed.
The premium paid is split into two parts: one part funds the Cost of Insurance (COI) and administrative fees, and the remaining part is credited to the cash value account. The cash value then earns interest, which can be used to pay future COI charges. This calculator estimates the level annual premium required to maintain the policy and hit a specific cash value target under given assumptions.
How to Calculate Estimated Annual Premium (Example)
- Determine Annual COI: Take the Policy Face Amount ($500,000) and multiply by the M&E Factor (0.25% or 0.0025). Result: $1,250.
- Determine Annual Interest Gain: Take the Target Cash Value ($100,000) and multiply by the Interest Rate (4.5% or 0.045). Result: $4,500.
- Calculate Net Annual Policy Cost: Subtract the Interest Gain from the COI. In this case, $1,250 – $4,500 = -$3,250. Since the interest gain covers the COI, the Net Annual Policy Cost is $0.
- Calculate Annual TCV Funding: Divide the Target Cash Value ($100,000) by the Duration (20 years). Result: $5,000.
- Sum for Estimated Annual Premium: Add the Net Annual Policy Cost ($0) and the Annual TCV Funding ($5,000). The Estimated Annual Premium is $5,000.
Frequently Asked Questions (FAQ)
What is the Cost of Insurance (COI) in a UL policy?
The COI is the mandatory monthly deduction for the death benefit component and is based on your age, health, and the current net amount at risk. It generally increases as the insured gets older.
Can my universal life premium be flexible?
Yes, premium flexibility is a key feature of UL. You can adjust the premium amount, but you must pay enough to prevent the cash value from depleting to zero, which would cause the policy to lapse.
How does the interest rate affect the cost?
A higher expected interest rate means the cash value grows faster, requiring less out-of-pocket premium from you to cover the cost of insurance and administrative fees, effectively lowering your required annual contribution.
What is the difference between UL and Indexed UL (IUL)?
UL policies typically credit interest based on a fixed or declared rate set by the insurer. IUL policies credit interest based on the performance of a stock market index (like the S&P 500) but often come with caps and floors on the interest rate.