1. BASIC FACTS: William Jones recently graduated with a MBA in Finance from The Wharton School at the University of Pennsylvania and has taken a job on Wall Street where he was given a six figure salary to start. William would like to purchase $1 million of permanent life insurance since he believes it would serve as a foundation for financial planning purposes. One of his college classmates accepted a position with Pacific Life Insurance Company and suggests an index universal life insurance product for William to consider.

A. Provide a list of advantages and disadvantages that exist for William concerning the index universal life insurance product as a financial foundation? Be certain to note any internal or external financial risks to William that might impact his decision.

B. Insurance carriers must estimate in advance both mortality and the interest that will be earned on policyholders premiums. How do insurance companies attempt to guard against deviations from these estimates?

C. A common concern with all universal life insurance policies is that the account value of the policy will be depleted prior to attaining a certain age or death because the target premium coupled with the interest rate credited to the account value isnt sufficient to cover the mortality cost of the insured causing the policy to lapse unless there are significant increases in policy premiums. This issue is popularly defined as policy burnout. In order to prevent policy burnout, life insurance companies developed an option called no lapse guarantee (NLG) which prevents the policy from lapsing until age 121, for example. Is the no lapse guarantee option an absolute certainty that a universal life policy will remain in force and effect until the death of the insured? Why or why not?