Ch. 2 Types of Life Policies

What is single premium whole life?

- designed to provide level death benefit until insured reaches age 100 for a one-time, lump-sum payment - policy completely paid-up after 1 premium payment - generates immediate cash

Describe Option B in a Universal Life Policy.

- increasing death benefit - increasing cash value at rate that death benefit increases - greater expenses than Option A because pure insurance remains level - cash value will be lower in later years

What is level term insurance?

- most common type of temporary protection purchased - level death benefit - level premium based on attained age (at renewal)

What are the three basic forms of whole life insurance?

1. Straight Whole Life 2. Limited-Pay Whole Life 3. Single Premium Whole Life

During a partial withdrawal from a Universal Life policy, which portion will be taxed? A. Interest B. Cash Value C. Principal D. Loan

A. Interest (interest earned on the withdrawn cash value is subject to taxation)

An insured purchased a variable life policy with a face amount of $50,000. Over the life of the policy, stock performance declined, and the cash value fell to $10,000. If the insured dies, how much will be paid out? A. $10,000 B. $40,000 C. $50,000 D. $60,000

C. $50,000 (cash value of variable life is not guaranteed; even if investments decline, they cannot be lower than initial guaranteed benefit amount)

TRUE or FALSE: Term policies develop cash values.

False

Does Option A or Option B in Universal Life allow the beneficiary to collect both the death benefit and cash value upon death or the insured?

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

TRUE or FALSE: Term Life and Whole Life both have level premiums.

True

TRUE or FALSE: Whole life insurance policies guarantee the death benefit.

True (if the insured lives to age 100, insurance company pays the owner the face amount (equal to cash value), but if insured dies prior to maturity date, the death benefit is paid to the beneficiary)

What kind of policy allows withdrawals or partial surrenders?

Universal Life

Which life insurance policy allows a policy-owner to take out a loan from the policy's cash value?

Variable universal life (no cash value, so they allow loans)

Term policies provide the _____________ amount of coverage for the _____________ premium, as compared to any other form of protection

greatest, lowest

A policy-owner with a Universal Life policy can skip a premium payment as long as:

the policy contains enough cash value to cover the cost of insurance for that premium period

When does the 10-day free look period begin in a life insurance policy?

when the policy is delivered

What is straight whole life insurance?

- basic whole life policy - level premium from time of policy to death/age 100 (based on issue age) - level and guaranteed death benefit - increasing cash value - lowest annual premium

What is limited-pay whole life insurance?

- designed so premiums are paid-up before age 100 - higher annual premium (because premium will be paid up by certain age/date) - increasing cash value (builds up faster) - example: 20-Pay Life or LP-65

Describe Option A in a Universal Life policy.

- level death benefit - increasing cash value - pure insurance decreases as time passes, which lowers expenses and allows for greater cash value in older years - death benefit "increases" at end to allow for corridor between cash value and death benefit

What is increasing term insurance?

- return of premium (ROP) - pays an additional death benefit to beneficiary equal to amount of premiums paid - ROP paid if death occurs during period of time or if insured outlives the policy term - significant increase in premium cost - returned premiums are not taxable (because amount returned equals amount paid-in)

What is an Annuity Certain?

- short-term annuity - pay until fixed amount is liquidated - no life contingencies

To sell variable life insurance policies, an agent must receive all of the following EXCEPT: A. SEC registration B. FIRNA registration C. A securities license D. A life insurance license

A. SEC registration (for securities, not agents)

Which of the following types of insurance policies would provide the greatest amount of protection for a temporary period during which an insured will have limited financial resources? A. Term B. Whole Life C. Annuity D. Variable Life

A. Term (provides a death benefit only, cost per $1k of coverage is less than other types of policies that create cash values)

When would a 20-pay whole life policy endow? A. When the insured reaches age 100 B. At the insured's age 65 C. After 20 payments D. In 20 years

A. When the insured reaches age 100 (limited-pay whole life policy, just like straight life, endows for the face amount if the insured lives to 100. Premium is paid off in 20 years)

The LEAST expensive first-year premium is found in which of the following policies? A. Decreasing Term B. Level Term C. Annually Renewable Term D. Increasing Term

C. Annually Renewable Term (purest form of insurance, death benefit remains level but premium increases each year with attained age)

What does "level" refer to in level term insurance? A. Premium B. Cash value C. Interest rate D. Face Amount

D. Face Amount

Under a pure life annuity, an income is payable by the company: A. Until the principal and interest are exhausted B. For a guaranteed period of time, whether or not the annuitant survives to the end of that period C. For as long as either the annuitant or a named beneficiary is alive D. Only for the life of the annuitant

D. Only for the life of the annuitant (with pure life annuity, income payments cease at the annuitant's death and there is no refund/payments to survivors)

What is decreasing term insurance?

- level premium - decreasing death benefit each year during policy term - commonly used to insure payment of mortgage - amount of coverage decreases as outstanding loan balance decreases each year - usually convertible, but not renewable because death benefit is $0 at end of policy term

What happens during the accumulation period of an annuity?

- period where owner makes payments into an annuity - known as pay-in period - period where annuity payments earn interest - grow tax deferred

What is annually renewable term insurance?

- purest form of term insurance - death benefit remains level - policy guaranteed to be renewable without proof of insurability - premium increases according to attained age - offers most insurance at the lowest cost

What is the purpose of a "target premium" for a Universal Life policy?

to cover the cost of insurance protection and keep the policy in force throughout its lifetime