8.2 YRT vs LCOI / T-100 Mortality Costing and Death-Benefit Design
Key Takeaways
- Yearly renewable term (YRT) cost of insurance inside UL starts lower and rises with attained age; it can leave more of each early deposit in the account if the policy is funded, and it can consume the account at older ages if it is not.
- Level cost of insurance (LCOI), which CISRO also names as T-100 mortality costing in a UL, is higher early and stays level, similar in idea to Term-100: more of the early deposit pays insurance, and later years are less exposed to a soaring mortality charge.
- Cost of insurance is charged on the net amount at risk (death benefit minus the policy fund), so death-benefit design and costing method must be read together.
- A level (sum insured) death benefit shrinks NAR as the fund grows, which lowers COI but also reduces exempt-test room unless the death benefit is increased; face-plus-fund keeps NAR near the face, costs more COI, and generally supports more exempt accumulation.
- Switching from face-plus-fund to level usually reduces NAR; switching the other way increases NAR and typically needs evidence of insurability.
Mortality costing is not the death-benefit option
CISRO’s next UL contents are the difference between yearly renewable term (YRT) and LCOI / T-100 mortality costing in a universal life product. Independent OpenExamPrep material here helps you study that split as a pricing method for the insurance piece, then study level versus increasing death-benefit options as the design that sets net amount at risk (NAR) — the amount on which COI is charged — and that interacts with exempt-test room. Mixing the two labels is a reliable exam miss: YRT is not “the increasing death benefit,” and LCOI is not “the level death benefit.” A policy can be YRT with a level face, YRT with face plus fund, LCOI with a level face, or LCOI with face plus fund, if the product offers those combinations.
COI is almost always deducted monthly. A common mechanical description (confirm the contract) is: annual COI rate per $1,000 × NAR / 1,000, then divided by 12. NAR is death benefit minus policy fund (Sun Life and other Canadian UL guides use the same identity). If the death benefit is $500,000 and the fund is $80,000, NAR is about $420,000 on a level-face design. If the death benefit is face plus fund, NAR stays about $500,000. Same YRT or LCOI rate table, different bill, because the rate is applied to a different NAR.
Guaranteed maximum COI rates in the contract are a consumer protection; current or illustrated rates may be lower and can be adjusted up to the guarantee. Do not treat an illustration’s current YRT scale as a promise. Term-100 as a standalone product is a different chassis (little or no CSV, a level premium to 100). LCOI / T-100 costing inside UL borrows that level mortality idea and still sits on an unbundled account.
Yearly renewable term (YRT) costing
YRT (sometimes yearly renewable to 100, or a variant such as YRT to 85 with a later pattern) charges mortality like annually renewable term: the rate per $1,000 of NAR rises with attained age (and rating class). Year one is relatively cheap. Later years are not.
Advantage if the policy is funded: early COI is low, so more of each net deposit can remain in the investment accounts. That is why accumulation-oriented illustrations often pair YRT with strong planned deposits.
Limitation: the cheap years do not last. If the owner minimum-funds, takes early withdrawals, or suffers weak investment returns, the account may be too small when YRT rates steepen. The policy can lapse at the age when replacing coverage is hardest. CISRO’s term chapter already taught that ART/YRT premiums explode; UL YRT is the same mortality shape hidden as a monthly deduction instead of a billed term premium.
YRT is not the default recommendation for a client with limited cash who “wants cash value in the early stages.” A CISRO sample Life item rejected UL-with-YRT for a new parent with tight cash and an education need; term with a guaranteed-insurability rider was the fit. Do not use YRT as a slogan for “inexpensive permanent.”
LCOI / T-100 mortality costing
Level cost of insurance (LCOI) prices mortality as a level charge for the duration the scale covers — CISRO’s phrase is LCOI / T-100 mortality costing. Early years cost more than YRT on the same NAR. Later years cost less than attained-age YRT. The insurance piece behaves more like a Term-100 premium: you overpay mortality early relative to YRT so you are not repriced into a corner at 75.
Advantage: the account is less likely to be eaten solely by a soaring COI in old age, which helps viability when the need is truly permanent (estate, joint last-to-die, corporate-owned life that must last).
Limitation: slower early fund buildup, a higher hurdle before investments look “successful,” and — after the 2017 exempt-test changes — industry materials (for example Equitable Life’s 2017 tax-change bulletin) noted a significant reduction in longer-term maximum funding for LCOI UL relative to the old test. That is a qualitative exam point: post-2016 LCOI UL often has less long-term deposit room. Do not invent an MTAR formula or a dollar cap; read the insurer’s maximum-deposit column and the e-book.
| Costing | Early COI vs the other method | Later COI | Typical exam story |
|---|---|---|---|
| YRT | Lower | Rises with age | Faster early account if funded; lapse risk if underfunded |
| LCOI / T-100 | Higher | Level | More insurance drag early; more stable later; watch post-2016 max funding |
Hypothetical index — not a quote, not a rate card. For a level $1,000 of NAR, picture YRT at 25, 40, then 120 over three career stages, and LCOI stuck near 70. The crossover is why a 35-year-old who will maximum-fund for ten years then stop cares which scale was illustrated, and why a 60-year-old buying estate coverage may prefer LCOI even if year-one COI is heavier.
Level death benefit (sum insured)
Canadian UL contracts use insurer language such as level, sum insured, or face amount. The death benefit is generally the sum insured, or the greater of the sum insured and the fund (so the insurer is never paying less than the account). As the fund grows, NAR falls. COI on a YRT or LCOI rate table is therefore charged on a shrinking risk amount. That can make a well-funded level-face UL look inexpensive in later years — until the exempt test complains that too much fund is sitting behind too little death benefit.
Industry and Income Tax Act mechanics (confirm the current e-book) allow the death benefit to be increased, including an automatic increase of up to 8% per year in prescribed circumstances, to keep the policy exempt. On multi-life policies issued under the 2017 rules, that 8% increase is applied at each life coverage, not as one blanket on the whole contract — which can mean less funding room than a pre-2017 multi-life design. A level-face owner who refuses every increase may see excess dumped to a service / side account (taxable) or may force a failure of the test. Section 8.3 covers corrective actions; here, remember that level face + fat fund = tight exempt room and falling NAR/COI.
Some Canadian corporate-owned products also offer level plus adjusted cost basis (ACB). The extra death benefit is meant to preserve capital dividend account credit (mortality gain ≈ death benefit − ACB). That option is a death-benefit design that keeps NAR from collapsing all the way to the residual insurance strip. Deep CDA arithmetic belongs with business life; the 8.2 skill is that adding ACB to the death benefit is still an NAR choice with a COI cost.
Increasing death benefit (face plus fund)
Insurance amount plus policy fund, sum insured plus fund, or similar labels pay face + account (subject to the contract’s exact formula). NAR stays approximately equal to the face. COI does not melt away as the client “wins” in the markets. The beneficiary receives both the insurance and the savings. That design generally creates more exempt-test room because the exemption-test maximum is tied to the death benefit of an exemption test policy: a larger death benefit can support a larger accumulating fund. People who intend to overfund within the legal maximum often need this option, or a level option that will accept exempt-test face increases.
The trade-off is higher lifetime COI for the same face. Face-plus-fund is not free “extra insurance”; it is paying to keep NAR high so the tax shelter can stay large. A client who only needs a level $500,000 cheque and will never dump in extra deposits is usually over-buying COI with this option.
Worked illustration — not a quote. Priya owns $500,000 UL with an $80,000 fund.
| Design | Death benefit | Approx. NAR | COI story | Exempt-room story |
|---|---|---|---|---|
| Level / sum insured | $500,000 (or fund if higher) | $420,000 | COI falls as the fund grows | Fund crowding the face stresses the exempt test; 8% or option change may be needed |
| Face + fund | $580,000 | $500,000 | COI stays on about $500,000 | Larger death benefit generally supports more exempt accumulation |
Switching options and exam traps
Owners can often switch from face-plus-fund to level because NAR falls. Switching from level to face-plus-fund increases NAR and typically needs evidence of insurability. Additional insurance purchased to satisfy the exempt test may be issued at attained-age YRT even if the base scale is LCOI — another reason to read the illustration footnotes instead of the marketing name.
Traps:
- YRT costing is not annually renewable term as a standalone policy, though the mortality shape is related (chapter 6).
- LCOI inside UL is not a promise of Term-100’s little or no CSV; UL still has an account that can be raided or starved.
- A level death benefit can still increase because of the exempt test; “level” means the chosen face pattern, not “the cheque can never change.”
- Cheap YRT + level face + minimum deposits is how illustrated “permanent” coverage dies at 78.
How does yearly renewable term (YRT) mortality costing differ from LCOI / T-100 costing inside a universal life policy?
A $500,000 universal life policy holds $80,000 in the policy fund. Which statement correctly describes net amount at risk and COI?
Which death-benefit design generally creates more exempt-test room for deposits and account growth, at the cost of higher ongoing cost of insurance?