Interest Sensitive & Non-traditional Policies
What can the cash value in a VUL be invested in?
A wide variety of separate accounts similar to mutual funds.
What is a Modified Endowment Contract (MEC)?
An overfunded policy that loses favorable tax treatment.
What must be disclosed in a universal life policy?
Any surrender charges.
What is the last-in first-out (LIFO) tax treatment for funds withdrawn from a MEC?
Assumes investment or earnings portion is withdrawn first, making funds fully taxable as ordinary income.
What is the main difference between traditional whole life insurance and variable whole life insurance?
Investment of policy values in separate accounts.
What happens if a policy exceeds the 7-pay test?
It is no longer a life insurance contract and is taxed as an investment.
What happens if a policy exceeds the 7-pay test?
It loses favorable tax treatment and is no longer a life insurance contract.
What advantage does adjustable life insurance offer in terms of coverage changes?
No new policy needs to be issued when changes are desired.
What is the growth potential of indexed universal life insurance?
Potential extra interest based on indexed returns.
What is the potential risk associated with a variable universal life policy?
Potential for loss.
What is the purpose of the S&P 500 in an Equity Index Universal Life insurance?
To tie accumulation values to a stock market index.
Where do investment gains go in universal life insurance?
Towards cash value.
What is variable universal life (VUL)?
A type of life insurance that combines characteristics of universal life and variable life.
Are the cash values in a variable life policy guaranteed?
No, they fluctuate and are not guaranteed.
What changes can be made by the policyowner in universal life insurance?
Premium payments and policy face amount.
What does a producer need to do to sell variable products?
Register with the National Association of Securities Dealers.
What are the values held in the insurer's separate accounts invested in for variable life insurance?
Riskier, potentially higher yielding assets.
What are insurance products considered as?
Securities contracts as well as insurance contracts.
What is the main purpose of traditional whole life insurance?
To match contractual guarantees and liabilities.
What is the purpose of the minimum guaranteed fixed interest rate component in indexed universal life insurance?
To provide a guaranteed interest rate.
What is the purpose of a variable insurance product?
To provide potential investment growth.
What is the purpose of the S&P 500 in Equity Index Universal Life insurance?
To tie accumulation values to a stock market index.
When is evidence of insurability required for an individual covered by a variable universal life policy?
When the death benefit is increased.
What is interest-sensitive whole life insurance?
Whole life insurance where cash value can increase beyond guarantee.
What is Equity Index Universal Life insurance (EIUL)?
Permanent life insurance tied to stock market index.
What is variable whole life insurance?
Permanent life insurance with values invested in separate accounts.
What do penalty taxes on premature distributions from a MEC normally apply to?
Policy loans.
What is the penalty for withdrawing from a MEC prior to age 59 ½?
A 10% penalty.
What is the 7-pay test?
A limitation on total premium payments in the first seven years.
What is the main advantage of interest-sensitive whole life insurance?
Cash value can increase beyond guarantee.
What are the benefits of a VUL?
Cash value growth potential and flexibility in premium payments.
What are adjustable life policies?
Combination of term and whole life insurance with flexibility.
What is the benefit of indexed universal life insurance?
Combines security of fixed insurance with growth potential of variable policy.
What is the benefit of indexed universal life insurance?
Combines security of fixed universal life insurance with growth potential of variable policy.
What types of investments are held in the insurer's separate accounts for variable life insurance?
Common stock, bond, money market, and other securities.
What types of investments are held in the insurer's general accounts for traditional whole life insurance?
Conservative investments selected by the insurer.
What is another name for interest-sensitive whole life insurance?
Current assumption whole life insurance.
Why are CAWL policies almost always a MEC?
Due to accelerated premiums.
What are the basic characteristics of a variable life policy?
Fixed premiums, fluctuating death benefit, and fluctuating cash values.
What are the characteristics of a variable life policy?
Fixed premiums, fluctuating death benefit, and fluctuating cash values.
What is the main advantage of adjustable life insurance?
Flexibility in coverage changes.
What are the basic characteristics of a universal life policy?
Flexible premiums, flexible benefits, no minimum death benefit, and cash value withdrawals.
What is the taxation treatment for funds withdrawn from a MEC?
Fully taxable as ordinary income.
What features does adjustable life insurance have?
Level premium, cash value, and flexibility.
Who decides which separate accounts to invest in for a VUL?
The contract owner.
What does the 'universal' component in VUL refer to?
The flexibility in making premium payments.
How does universal life insurance differ from whole life insurance?
Universal life allows policyowners to determine premium payments and adjust the policy face amount.
What is the difference between a variable insurance product and a fixed universal life insurance?
Variable products have investment risk, while fixed products have a guaranteed interest rate.
What is the minimum guaranteed fixed interest rate component in indexed universal life insurance policies?
A component that provides security.
What are the benefits of a variable universal life policy?
Guaranteed minimum death benefit and growth potential.
What options does interest-sensitive whole life insurance provide to the insured?
Increase face amount or use extra cash value to lower future premiums.
What is the minimum interest guarantee for cash value accumulations in universal life insurance?
Subject to a minimum interest guarantee.
When does taxation occur for a MEC?
Taxation only occurs when cash is distributed.
What does the 'variable' component in VUL refer to?
The ability to invest in separate accounts with varying values.
Who determines the face amount protection and premium in adjustable life insurance?
The policyowner.
What is the purpose of penalty taxes on premature distributions from a MEC?
To discourage early withdrawals.
What is the guaranteed minimum death benefit in a variable life policy?
A death benefit that fluctuates over the minimum.
What is a variable insurance product?
A product where investment risk is transferred to the policyowner.
What is universal life insurance?
A variation of whole life insurance with considerable flexibility.
What is the main advantage of universal life insurance?
Considerable flexibility in premium payments and policy changes.
What is the purpose of the 7-pay test?
To discourage premium schedules that result in a paid-up policy before seven years.
What is the purpose of variable whole life insurance?
To help offset the effects of inflation on death benefits.
