2-15 License - Chapter 2 (Part 1)

What are two common versions of limited-pay life?

1) 20pay life whereby coverage is completely paid for in 20 years 2) Life Paid-Up at 65 (LP 65) whereby the coverage is completely paid up for by the insured's age 65

Permanent Life Insurance

A general term used to refer to various forms of life insurance policies that build cash value and remain in effect for the entire life of the insured (or until age 100) as long as the premium is paid.

What type of life policy is issued when the insurer determines the appropriate type of insurance to meet the insured's needs based on how much coverage is needed and the affordable amount of premium?

Adjustable Life Policy

What occurs when an ROP policy expires if the insured is still alive?

An ROP policy offers the pure protection of a term policy, but if the insured remains healthy and is still alive once the term limit expires, the insurance company guarantees a return of premium. However, since the amount returned equals the amount paid in, the returned premiums are not taxable.

What selections does an individual make upon applying for a universal life policy?

At the time that an individual applies for a universal life policy, he or she selects: 1) the level of premium 2) cash value 3) death benefit 4) premium-paying period that is desired

Why does the death benefit Option A have an increasing death benefit in older years as the cash value exceeds the level death benefit amount?

Because of the "statutory definition of life insurance" by the IRS, there must be a specified "corridor" or gap maintained between the cash value and the death benefit in a life insurance policy. If this corridor is not maintained, the policy will no longer be defined as life insurance for tax purposes.

What type of temporary protection features a level premium and a death benefit that decreases each year over the duration of the policy term?

Decreasing Term

When is a Decreasing Term policy generally purchased?

Decreasing term is primarily used when the amount of needed protection is time sensitive, or decreases over time. Decreasing term coverage is commonly purchased to insure the payment of a mortgage or other debts if the insured dies prematurely. The amount of coverage thereby decreases as the outstanding loan balance decreases each year.

When is a Joint Life policy appropriate for business partners?

Joint Life is also used to insure the lives of business partners in the funding of a buy/sell agreement and other business life needs.

What is a minimum premium on a universal life insurance policy?

The amount needed to keep the policy in force for the current year. Paying the minimum premium will make the policy perform as an annually renewable term product.

In what ways are the death benefits and cash value not guaranteed on a Variable Whole Life policy?

The cash value and/or death benefit may increase or decrease over the life of the policy depending on the investment performance of the underlying sub-account. The death benefit, however, generally cannot decrease below the initial face amount of the policy. The premium is fixed and will not change over the life of the policy.

What is the major difference between a Survivorship Life Policy and a Joint Life Policy?

The major difference is that survivorship life pays on the last death rather than upon the first death.

Who assumes the investment risk in a variable life policy?

The policyowner. The policyowner assumes the risk of unfavorable investment performance in an underlying subaccount. There is no guarantee of investment growth.

What is a target premium on a universal life insurance policy?

The recommended amount that should be paid on a policy in order to cover the cost of insurance protection and keep the policy in force throughout its lifetime.

Which death benefit for a universal life policy involves the death benefit remains level while the cash value gradually increases, thereby lowering the pure insurance with the insurer in the later years?

Option A (Level Death Benefit option)

Which term policy provision allows the policyowner the right to renew the coverage at the expiration date without evidence of insurability?

Renewable - The premium for the new term policy will be based on the insured's current age.

Term Insurance provides Pure Death protection if...

1) If the insured dies during this term, the policy pays the death benefit to the beneficiary; 2) If the policy is canceled or expires prior to the insured's death, nothing is payable at the end of the term; 3) There is no cash value or other living benefits.

How is Term Insurance usually used?

Generally purchased to provide temporary coverage, a large amount of coverage for a relatively small premium, or both. It would make little sense to purchase permanent insurance to insure a short-term debt if that is all the coverage is needed for.

How is a Variable Universal Life policy like a Variable policy?

Like variable life, the policyowner rather than the insurer, decides where the net premiums (cash value) will be invested. Also, like variable life, the cash values are not guaranteed, and the death benefit is not fixed.

Term Insurance

Temporary protection because it only provides coverage for a specific period of time. (a.k.a. pure life insurance) Term policies provide for the greatest amount of coverage for the lowest premium as compared to any other form of protection.

What is the major distinction between a Variable Whole Life policy and a traditional whole life policy?

The major distinction is that the policyowner may allocate the premium, after certain deductions for expense loads, into a subaccount that is held by the insurance company, called the separate account. Another factor that distinguishes variable life from traditional whole life is that the death benefit and cash value are not guaranteed under variable life.

What benefits occur if a policyowner pays additional premiums above and beyond what is required under the permanent form?

The policy can accumulate greater cash value or to shorten the premium paying-period.

The policyowner of a Universal Life policy may skip paying the premium and the policy will not lapse as long as...

The policy contains sufficient cash value to cover the cost of insurance for that premium period.

Interest-Sensitive Whole Life

A fixed premium whole life policy that provides a guaranteed death benefit to age 100. This type of policy credits the cash value with the current (non-guaranteed) interest rate that is usually comparable to money market rates. In addition, the policy also provides for a minimum guaranteed rate of interest.

Survivorship Life Policy

Survivorship life (also referred to as "second-to-die" or "last survivor" policy) is much the same as joint life in that it insures two or more lives for a premium that is based on a joint age.

What are some examples of a separate account on a variable whole life policy?

The types of sub-accounts that are available include 1) bond accounts 2) growth stock accounts 3) money market accounts 4) real estate accounts 5)a balanced fund account The insurance company is required to maintain a separate account for purposes of the sub-accounts that are available to the policyowner.

Joint Life

A single policy that is designed to insure two or more lives. Joint life policies can be in the form of term insurance or permanent insurance. The premium for joint life would be less than for the same type and amount of coverage on the same individuals.

What is type of temporary protection where the death benefit does not change throughout the life of the policy.

Level Term - The most common type of temporary protection purchased.

When is a survivorship life policy typically used?

Since the death benefit is not paid until the last death, the joint life expectancy in a sense is extended, resulting in a lower premium than that which is typically charged for joint life, which pays upon the first death. This type of policy is often used to offset the liability of the estate tax upon the death of the last insured.

What type of temporary protection has a death benefit remains level and the policy may be guaranteed to be renewable each year without proof of insurability, but the premium increases annually according to the attained age, as the probability of death increases?

(ART) Annually Renewable Term - The purest form of term insurance.

Joint whole life, which functions similarly to an individual whole life policy with two major exceptions...

1) The premium is based on a joint average age that is between the ages of the insureds. 2) The death benefit is paid upon the first death only.

What is a universal life insurance policy?

A flexible premium adjustable policy in which the policyowner may pay additional premiums above and beyond what is required under the permanent form in order to accumulate greater cash value or to shorten the premium paying-period.

What type of term policy is convertible, but not generally renewable because the death benefit is at $0 at the end of the policy term?

Decreasing Term

What type of temporary protection features level premiums and a death benefit that increases each year over the duration of the policy term?

Increasing Term - The amount of the increase in the death benefit is usually expressed as a specific amount or a percentage of the original amount.

When is a Increasing Term policy generally purchased?

Increasing term is often used by insurance companies to fund certain riders that provide a refund of premiums or a gradual increase in total coverage, such as the cost of living or return of premium riders.

What is the primary difference between Interest-Sensitive Whole Life and Variable Whole/Universal Life?

Interest-Sensitive Whole Life provides a guaranteed death benefit to age 100 and a minimum guaranteed rate of interest.

What is the purpose of establishing the target premium for a universal life policy?

To keep the policy in force. The recommended amount that should be paid on a policy in order to cover the cost of insurance protection and keep the policy in force throughout its lifetime.

Which of the following features of a variable life policy may be fixed? -Death Benefit -Cash Value -Premium -Interest Rate

Premium Only the policy premium may remain fixed over the life of the policy; the rest of the features listed may fluctuate and are not guaranteed.

When is a Joint Life policy appropriate for a married couple?

For example, a married couple purchasing a house may use a Joint Life policy for mortgage protection if both spouses work and earn close to the same amount of income. If one spouse dies, the insurance pays the mortgage for the surviving spouse.

How is a Variable Universal Life policy like a Universal policy?

Like universal life, it provides the policyowner with flexible premiums and an adjustable death benefit.

Which type of whole life insurance policy is designed so that the premiums for coverage will be completely paid-up well before age 100?

Limited-Pay Life Insurance Unlike straight life, limited-pay whole life is designed so that the premiums for coverage will be completely paid-up well before age 100. All other factors being equal, this type of policy has a shorter premium-paying period than straight life insurance, so the annual premium will be higher.

Equity-Indexed Life

The main feature of indexed whole life (or equity index whole life) insurance is that the cash value is dependent upon the performance of the equity index, such as S&P 500 although there is a guaranteed minimum interest rate. The premium is fixed. The death benefit is guaranteed.

The policyowner of an adjustable life policy wants to increase the death benefit. What must occur for this to happen?

The policy owner would need to provide evidence of insurability in order to increase the death benefit on the policy.

With an adjustable life policy, as the insured's needs change the policyowner can make adjustments in his or her policy. What options are typically available?

Typically, the policyowner has the following options: 1) Increase or decrease the premium or the premiumpaying period; 2) Increase or decrease the face amount; or 3) Change the period of protection.

What are the four characteristics of Whole Life Insurance?

1) Level premium: the premium for whole life policies is based on the issue age; therefore, it remains the same throughout the life of the policy. 2) Death benefit: the death benefit is guaranteed and also remains level for life. 3) Cash value: the cash value, created by the accumulation of premium, is scheduled to equal the face amount of the policy when the insured reaches age 100 (the policy maturity date), and is paid out to the policyowner. (Remember: the insured and the policyowner do not have to be the same person.) 4) Living benefits: the policyowner can borrow against the cash value while the policy is in effect, or can receive the cash value when the policy is surrendered. The cash value, also called nonforfeiture value, does not usually accumulate until the third policy year and it grows tax deferred.

What are the current two components of a universal life policy?

A universal life policy has two components: an insurance component and a cash account. 1) The insurance component of a universal life policy is always annually renewable term insurance. 2) The cash account accumulates on a tax deferred basis each year and earns either the guaranteed contract rate or the current rate, whichever is higher.

What is a Refund of Premium life insurance policy?

It is an increasing term insurance policy that pays an additional death benefit to the beneficiary equal to the amount of the premiums paid. The return of premium is paid if the death occurs within a specified period of time or if the insured outlives the policy term.

What is the appropriate situation for a Joint Life policy?

Joint life policies are used when there is a need for two or more persons to be protected; however, the need for the insurance is no longer present after the first of the insureds dies.

Which death benefit for a universal life policy features a total death benefit that will always be equal to the face amount of the policy plus the current amount of cash value?

Option B (Increasing Death Benefit Option) The death benefit includes the annual increase in cash value so that the death benefit gradually increases each year by the amount that the cash value increases.

What type of whole life policy is designed to provide a level death benefit to the insured's age 100 for a one-time, lump-sum payment?

Single Payment Whole Life - The policy is completely paid-up after one premium and generates immediate cash.

Which type whole life policy means the policyowner pays the premium from the time the policy is issued until the insured's death or age 100 (whichever occurs first) and often has the lowest annual premium?

Straight life (also referred to as ordinary life or continuous premium whole life)

Which of the following policies would have an IRS required corridor oe gap between the cash value and the death benefit? - Variable Universal Life -Universal Life - Option A -Universal Life - Option B -Equity Indexed Universal Life

Universal Life - Option A

What is the primary purpose of a Variable Whole Life Policy? What risks coincide with this type of policy?

Variable life was designed primarily to serve as a hedge against inflation. However, in return for the potential of investment growth, the policyowner assumes the downside risk of unfavorable investment performance of the underlying subaccount, which in turn may result in a death benefit that falls short of the policyowner's needs.

In what situations may a limited-pay whole life policy be best suited for the insured? Give example.

Limited-pay policies are well suited for those insured who do not want to be paying premiums beyond a certain point in time. For example, an individual may need some protection after retirement, but does not want to be paying premiums at that time.

Variable Universal Life

Combination of universal life and variable life.

Which term policy provision provides the policyowner with the right to convert the policy to a permanent insurance policy without evidence of insurability?

Convertible - The premium will be based on the insured's attained age at the time of conversion.

What type of policy provides lifetime protection, and includes a savings element (or cash value)?

Whole Life Insurance Whole life policies endow at the insured's age 100, which means the cash value created by the accumulation of premium is scheduled to equal the face amount of the policy at age 100.

Which type of policy allows for the same benefits of other traditional whole life policies with the added benefit of current interest rates?

Interest Sensitive Whole Life This type of policy provides the same benefits as other traditional whole life policies with the added benefit of current interest rates, which may allow for either greater cash value accumulation or a shorter premium-paying period.

Variable Whole Life

It is a fixed-premium policy with the addition of an underlying investment account. However, it does not contain the same guarantees of principal and interest that are found in traditional whole life policies.