Analysis of universal life insurance cash flows with stochastic asset models

Universal life insurance is a flexible product which provides the policyholder with life insurance protection as well as savings build-up. The performance of the policy is hard to be evaluated accurately with deterministic asset models, especially when the fund is placed in accounts that track the performance of equities. This project aims to investigate factors that affect the savings (account value) and insurance coverage (death benefit) under a stochastic framework. Time series models are built to capture the complex dynamics of returns from two commonly offered investment options, T-bills and S&P 500 index, with and without interdependence assumption. Cash flows of account value, cost of insurance, and death benefit are projected for sample policies with common product features under multiple investment strategies. The comparison reveals the impact of asset models and fund allocation on the projected cash flows.