Chapter 7 - Life Insurance

A salesperson who wishes to represent a variable life insurance company must properly register with all of the following regulators EXCEPT: a. The State Insurance Commissioner b. The State Securities Commissioner c. The Federal Insurance Commission d. FINRA

C To be properly licensed to sell variable insurance products, a salesperson must obtain the appropriate FINRA license (Series 6 or 7), as well as state securities and insurance licenses. There is no federal insurance licensing agency (7-20)

Death benefits in a variable life insurance policy are prone to fluctuation for all of the following reasons EXCEPT: a. Outstanding loans reduce the death benefit b. Overdue premiums decrease the death benefit c. Management, administrative, and mortality costs reduce the death benefit d. Investment returns may be in excess of the Assumed Interest Rate

C Management, administrative, and mortality costs reduce the cash value but not the death benefit. (7-13)

Which of the following are TRUE of both variable life insurance and variable annuities? I. The investment risk is borne by the contract owner. The product must be sold with a prospectus. II. Partial surrenders are first treated as a tax-free return of principal. III. If the contract owner dies, the beneficiary receives any proceeds tax-free. a. I and II only b. III and IV only c. I, III, and IV only d. I, II, III, and IV

A Although partial surrenders of variable life insurance policies are first treated as a return of principal up to the amount of basis, variable annuities are subject to Interest first taxation. Only life insurance proceeds pass to beneficiaries tax-free. Beneficiaries of variable annuity contracts are taxed on the proceeds in the same manner as the annuitant (7-13, 14)

An insurance company may override a variable life policyholder's right to: I. Vote to change the investment policies of the separate account II. Receive a proxy, if available III. Reject the selection of an investment adviser to the separate account a. I only b. II and III only c. I, II, and III d. None of the above

C Although variable life insurance policyholders have the right to vote on certain matters concerning the separate account, those votes can be ignored or overridden by the insurance company if they conflict with the state insurance laws. (7-22)

Which of the following statements are TRUE concerning variable life separate accounts? I. A favorable performance increases the death benefit. II. Investments may include common stock, money-market instruments, and bonds. III. Changes in the investment policy can be made at the discretion of the investment managers. IV. Account assets are technically owned by the insurance company and are carried on the insurance company's financial statements. a. I and II only b. II and III only c. I, II, and IV only d. I, II, III, and IV

C If investment returns exceed the Assumed Interest Rate, the death benefit increases above the minimum benefit. Separate account investments can include common stocks, money-market instruments, and bonds. Although policy holders can vote on changes in the investment policy, the insurance company technically owns the assets of the separate account. (7-13)

Which of the following statements is/are TRUE regarding variable life insurance policies? I. Insurance regulators have the right to disapprove contracts between the separate account and its investment adviser. II. Changes in the investment policy of the separate account must be approved by shareholders. III. The managers under specific circumstances may reject motions passed by shareholders. a. I only b. II only c. I and II only d. I, II, and III

D All of the statements listed regarding variable life policy owners are correct under the Investment Company Act of 1940. If a shareholder motion violates any provisions of state insurance law, the managers of the separate account have the right to reject the motion. The insurance regulators with jurisdiction over the variable life company have the right to disapprove an advisory contract between the separate account and its portfolio manager. (7-22)

Mike's spouse died recently. Mike has two small children, ages two and four. Mike's spouse was covered by a variable life insurance policy. Rather than take a lump-sum payout of the death benefit, Mike would prefer a payout that would supplement his income until the children have finished college. Which of the following settlement options would best meet Mike's needs? a. Fixed-period option b. Fixed-amount option c. Life income with period certain d. Joint and last survivor income

A Since Mike wants supplemental income only until his children have finished college, the fixed-period option would probably be most appropriate. Under this option, the insurance company pays the beneficiary equal installments, at regular intervals, over a specified period of time. (7-25)

Which of the following statements is TRUE of an insurance company fixed account, but not true of a separate account? a. It is often available as a subaccount in a variable product. b. The insurance company guarantees its returns. c. It is registered under the Investment Company Act of 1940. d. Its manager must be a registered investment adviser.

B The returns on the fixed account of an insurance company are guaranteed by the company. There is no guarantee on the returns of a separate account, the purchaser assumes the investment risk. Choice (a) is incorrect because, in addition to several separate accounts, variable products often allow investors to allot part of their investment to the fixed account. Choice (c) is incorrect because only separate accounts, not fixed accounts, are registered with the SEC. Likewise, choice (dD0 is incorrect since managers of separate accounts, not fixed accounts, must be registered investment advisers. (7-4, 5)

The cash surrender value of a variable life insurance policy is calculated: a. Daily b. Weekly c. Monthly d. Annually

C The cash surrender value of a variable life insurance policy is calculated monthly. If one wanted to know the current cash value of the policy, it is normally calculated everyday similar to a mutual fund. (7-13)

Which of the following statements is TRUE concerning a variable life insurance policy? a. There is a minimum death benefit b. There is neither a minimum nor a maximum cash value c. A partial surrender reduces the face amount of the policy d. All of the above

D In a variable life insurance policy, the death benefit fluctuates with the performance of the separate account, but it cannot fall below a specified minimum amount. In addition, there is no guaranteed minimum cash value nor a specified maximum cash value. Instead making a policy loan, the policyholder can surrender a portion of the policy, reducing the cash value and the minimum death benefit. This would also result in a reduction of the premium (7-13, 14)