How does the mortality expense impact a VUL policy?

The mortality expense is a crucial component in a Variable Universal Life (VUL) policy as it represents the cost of providing the death benefit to the policyholder. Specifically, this expense is deducted from the cash value of the policy, which in turn affects the overall cost of coverage.

In a VUL policy, the premiums that a policyholder pays not only contribute to the death benefit but can also be allocated to investments, thereby building cash value over time. However, the mortality expense represents the insurer’s need to cover the risk of paying out the death benefit, and it is charged on a periodic basis. If this expense is high relative to the cash value accumulated, it can reduce the amount of cash value available and impact the overall performance of the policy.

Understanding this aspect is essential because it illustrates how the cost of insurance can directly affect the investment component of the policy. If the mortality expense increases, it means a larger deduction from the cash value, thereby potentially decreasing the overall cash surrender value and the investment returns if not offset by sufficient premium payments or investment performance.