Unit 4 - Types of Life Insurance Policies

The party to whom the life insurance policy cash values belong is

THE POLICY OWNER The accumulation that builds over the life of a policy is referred to as the policy's cash value. It belongs to the policy owner, who may or may not be the insured.

If a policy owner purchases a $250,000 single premium whole life insurance policy and needs additional funds for retirement 6 months later,

HE CAN DRAW ON THE CASH VALUE TO SUPPLEMENT HIS RETIREMENT INCOME Because a single premium whole life policy involves a large, onetime premium payment at the beginning of the policy period, the policy is completely paid for at that point. The payment of a single premium gives it an immediate cash value. As a result, the policy owner can draw on the cash value of a whole life insurance policy to supplement his retirement income.

Withdrawals from a universal life policy

DO NOT REQUIRE REPAYMENT Universal life policies allow both policy loans and withdrawals from the cash value in the policy. Both the death benefit and cash value are reduced by the amount of the withdrawal.

Which of the following statements pertaining to the conversion privilege in group insurance policies is NOT correct?

INSURED WHO RESIGN OR ARE TERMINATED HAVE 365 DAYS IN WHICH TO CONVERT THEIR COVERAGE TO INDIVIDUAL POLICIES Concerning the conversion privilege in group health insurance, an insured employee who resigns or is terminated has 31 days in which to take out a conversion policy without having to show evidence of insurability.

A prospect with a young family needs affordable whole life insurance. As a rising young executive, it is likely that the prospect's current limited resources will increase substantially over the next 15 years. What type of whole life insurance variation would you recommend?

MODIFIED LIFE In a modified whole life policy, premiums are generally lower in the first years of the policy and higher in later years. This type of policy is designed for persons with limited financial resources who have the promise of higher resources in later years. The total over the period of the policy would be equivalent to the straight whole life policy.

In contrast to traditional whole life insurance policies, term life insurance

PROVIDES PURE INSURANCE PROTECTION ONLY Both term and permanent life insurance include pure insurance protection. However, only permanent life insurance includes a cash value that is the policy owner's property at all times.

Which of the following provides for an enhanced death benefit on a universal life policy?

THE OPTION B Option B (or option 2) allows the cash value in the account to be added to the death benefit. For example, if a $100,000 policy has $25,000 of cash value, the beneficiary will receive $125,000.

Roland is 45 years old and married. he has a 19-year-old son who is in his first year of studies at a local university. He also has an 8-year-old daughter. A decreasing term policy could be recommended for Roland for which of the following reasons?

TO GUARANTEE THAT HSI SON'S COLLEGE TUITION WILL BE COVERED Decreasing term insurance is designed to address needs that decrease from year to year. A decreasing term policy could be written for an amount of insurance to equal the remaining cost of the son's tuition. It would not be used as a method to create funds for the daughter's education, nor does it create any cash value that could be borrowed.

Diane would like to purchase a life insurance policy in which the face amount remains level and the cash value grows each year until she dies (or reaches age 100). Which type of policy should she purchase?

WHOLE LFIE POLICY The cash values of a whole life policy grow steadily, and if Diane lives and premiums are paid to age 100, she will be entitled to the face amount.

Which of the following policies endows at age 100?

WHOLE LIFE AND LIMITED-PAY LIFE A policy endows when it reaches the point when the cash value equals the face amount. Endowment policies can endow at different ages. Whole life and limited-pay life policies endow at age 100. Term policies do not endow.

A life insurance policy in which the face amount remains level and the cash value grows to an amount equal to the face amount when the insured reaches age 100 is

A WHOLE LIFE POLICY The cash values of a whole life policy grow steadily and, if the insured lives and premiums are paid to age 100, will equal the face amount.

Helen has just taken out a modified whole life policy. Which of the following statements is CORRECT?

THE PREMIUM WILL BE LOWER DURING THE NEXT FEW YEARS AND THEN BE INCREASED TO A HIGHER, CONSTANT LEVEL The modified whole life policy is issued with a level premium payable during the first few (usually 5) years the tis lower than the normal whole life policy rates. The premium increases and is higher than normal thereafter.

Which of the following statements pertaining to modified whole life and graded premium whole life policies is NOT correct?

THE PREMIUM FOR MODIFIED WHOLE LIFE INCREASES EACH YEAR AFTER THE FIRST FEW YEARS OF POLICY ISSUE. Premiums for modified whole life policies do not increase annually after the first few years. They level off after the premium period.

Gene, age 20, purchased a $50,000 life insurance policy. The premium at issue is lower than normal whole life rates, and it increases each year for the first 5 years of the policy period. After that, the premium levels off. What type of policy does Gene own?

GRADED PREMIUM WHOLE LIFE Graded premium whole life, like modified whole life, redistributes the policy premiums. Th premium is lower than normal whole life rates during the preliminary period following issue (usually 5-10 years) and increases each year until leveling off after the preliminary period. A modified whole life policy has a level premium during the preliminary period.

An individual wishes to purchase whole life insurance but does not wish to pay premiums past retirement age. Which of the following policies should the person buy?

LIMITED-PAY With a limited-pay life policy, the insured pays premiums for a specified amount fo time, which 2 stipulations: (1) the premium payment period must last at least 10 years; and (2) premiums must be paid up by the age of 65. Single premium life insurance is permanent cash value whole life insurance that is purchased with 1 large premium. As its name implies, it requires no further premiums to keep the coverage in force for the life of the insured. Modified premium policies typically have a lower fixed premium for the first 3- or 5-year period, at which point premiums increase. Graded premium policy premiums are lower in the initial period and gradually increase before leveling off for the duration of the contract.

While a policy loan is generally an available option with any form of permanent life insurance, a partial withdrawal of cash value form the policy is available only with which of the following types of life insurance?

UNIVERSAL LIFE While policy loans are available with any type of permanent life insurance policy, partial cash value withdrawals require the policy flexibility that only universal life insurance offers.

Which of the following statements regarding current assumption whole life insurance is NOT correct?

DUIRNG A PERIOD OF RELATIVELY HIGH INTEREST RATES THE PREMIUMS COULD BE INCREASED Current assumption whole life policies, also known as interest-sensitive whole life, offer flexible premium payments that are tied into current interest rate fluctuations. Depending on interest rate fluctuation, the insurer reserves the right to increase or decrease the premium within a certain range. During periods of low interest rates, premiums could be increased. During periods of high interest rates, premiums could be reduced. Premium adjustments are typically made on an annual basis.

Of the following, which best describes a need that decreasing term insurance is often used to meet?

PROVIDING FUNDS TO PAY OFF AN OUTSTANDING LOAN AT A REASONABLE PREMIUM Decreasing term insurance is often used to provide funds to pay off an outstanding loan in the event the insured dies before the loan has been fully repaid. The decreasing coverage can often track with the outstanding loan balance at a premium that remains level. Compared to other types of life insurance policies, decreasing term can typically be purchased at a reasonable premium.