Chapter 4 (Exam Prep)

Another regulation regarding variable life policies is the 12% Rule, which states that when soliciting a new policy, the producer may not use an interest rate greater than 12%.

12% Rule = No Rate Greater Than 12% Can Be Used In Selling Policies

All of the following term life insurance policies have level premiums, EXCEPT:Select one:a. Levelb. Decreasingc. Increasing

ART

What are the two types of level term insurance?

Annual renewable term & Level premium term

Increasing Term = rising death benefits

Increasing term insurance provides an increasing face amount with level premiums. The increase occurs at certain intervals over the policy period. Increasing term insurance is not as common as other types of term insurance.

Term poliices and increased premiums

Term policies that increase premiums upon renewal are called step-rate because the initial premium literally steps up to a higher amount each time the policy is renewed. Term policies that are renewable or convertible also require a higher premium upon these events.

To make UL policies more attractive, insurers have added secondary guarantees, where if certain minimum premium payments are made for a given period, the policy will remain in force for the guarantee period even if the cash value drops to zero. These provisions are called "No Lapse Guarantee" riders.

Universal Life = Buy Term & Invest the Difference

Which of the following policies allows the policyowner to buy term and direct the investments made in the cash value account? Select one: a. Variable b. Universal c. Variable universal life d. Equity indexed universal life

c Variable universal life is universal life insurance with a separate account.

variable products +...

have separate accounts

When universal life policies first came out in the 1970s, they were front-end loaded, meaning that sales and administrative charges were deducted from the first-year premium. Currently, universal life policies use back-end loading, meaning that the sales and administrative charges are not deducted until the policy owner takes out cash value from the policy or surrenders the policy for its cash value.

Often, back-end loading decreases over a period of years: In the first or second years, the charge may by 10%; In the 10th or 11th year, the charge may be zero. There are two adjustments made to the policy's cash value each month: Cost of death protection deducted and Current interest rate credited.

Option 2 - Increasing Death Benefit - Policy Face Amount Plus Cash Value

Option 2 pays the policy face amount plus cash values, which consists of level term and increasing cash values. Per compliance with TAMRA, policy cash value must not be excessively larger than the level term insurance protection in order to keep the policy's classification as life insurance.

Advantages of term life insurance

For insurers: For most people term insurance is temporary protection that cannot be renewed beyond a certain age, such as 75. The insurer is betting the insured will live beyond the policy period, so the death benefit will not be paid out. For consumers: Term insurance provides the largest amount of coverage for the least amount of premium. Term insurance is appropriate for a person wanting to insure a short-term or long-term debt, such as a car loan or mortgage, respectively. Term insurance is also appropriate for young families or young professionals who require a large amount of coverage, but cannot afford the larger premiums of permanent insurance until later on when their financials are more established.

Term-to-65 = ...

Option to Convert to Cash-Value Policy

Diffrences to whole life from limited payment

Policy is paid-up prior to the age of 100 Premiums tend to be higher Premium-paying period is shorter Cash value accumulates more quickly

Other types of term insurance

Reentry term, indeterminate premium term, interim term, return of premium (ROP)term policy, life expectancy contract

DONT ACCRU CASH VALUE UNTILL 3RD YEAR

The cash value in permanent policies grows (accrues interest) tax-deferred. Due to the amount of the agent's commission in the first year and the expenses associated with effectuating a life insurance policy, permanent policies do not accrue cash value until the third policy year.

most important points with credit life:

The creditor can't make money off a credit policy. The policy can't be for more than the debt. The policy term can't be longer than the debt. The creditor can't force the debtor to buy the policy from them.

What part of a mortgage reduction policy decreases over time? Select one: a. Policy premiums b. Cash value c. Face amount d. Policy term

c A decreasing term policy (used for mortgage reduction insurance) has a decreasing face amount.

Which term policy has level premiums and a level face amount? Select one: a. Annual renewable term b. Decreasing term c. Increasing term d. Level premium term

d Level premium term, also called level premium level term, has a level face amount and level premiums. Premiums tend to be higher than annual renewable term because they are level throughout the policy period.

What are the benefits of a convertible and renewable term life insurance policy? Select one: a. Lower premiums for higher face amounts b. Increasing face amount with a level premium c. Decreasing face amount with a level premium d. Proof of insurability is not required to convert or renew coverage.

d Renewable and convertible term life policies allow the insured to renew or convert coverage without needing to provide proof of insurability.

Annual Renewable Term

-a level face amount with an increasing premium. - is guaranteed renewable annually without proof of insurability. -usually has a maximum age at which the policy is no longer renewable.

Adjustable Life

Although a policy of the past, adjustable life policies are a mixture of whole and term insurance, consisting of a whole life base with a term rider. The policyowner chooses the amount of coverage needed and how much premium they can pay. The insurer takes that information and determines what mix of term and whole life is most appropriate. The advantage of an adjustable life policy is that the policyowner can adjust several policy features as their needs change without having to apply for a new policy. Changes the policyowner can make to an adjustable life policy: Raise or lower premium Raise or lower face amount Change coverage period Change premium-paying period

Differences with straight life and limited payment:

Immediate cash value Single premium policy is not "front-end loaded", meaning costs of administering the policy are not deducted from the initial premium. Instead, a surrender charge is levied if the policy is surrendered during its first 10 years.

Drawback of Whole

Protection is more expensive because of living benefits Premium paying period may extend beyond the income-earning years

Survivorship: Second-to-Die

With a second-to-die, or survivorship life policy, two lives are insured on one policy, and the policy pays out only upon the death of the second insured. Survivorship life policies are frequently used for estate planning. The policy proceeds are used to pay estate taxes.

Why are whole life policies more expensive than some other insurance options? Select one: a. They must cover cash values, net insurance and mortality costs, as well as expenses. b. They last a really long time. c. The policyholders are high risk. d. Whole life is generally not more expensive.

a

What type test is a MEC subject to? Select one: a. 7-pay test b. 6-pay test c. 8-pay test d. 10-pay test

a A Modified Endowment Contract is an overfunded life insurance policy. It is subject to the 7-pay test, and it has a 10% withdrawal penalty before the age of 59 1/2.

Convertible Term

allows term life policyowners to convert their term insurance into permanent policies without showing proof of insurability. The conversion option must be specifically noted in the contract, including the terms and conditions upon which it can be exercised. When an insured converts their term policy, the permanent policy's premiums will be based on the insured's attained age or original age. The attained age is the insured's age upon conversion. The original, or issue age, is the age of the insured upon purchase of the term policy. Depending on the terms of the conversion option, the policyowner may choose which age to use. Most policies use the attained age upon conversion. If the original age is used, the premiums will be lower than if the attained age is used. Regardless, premiums under the converted policy will be higher than under the term coverage because the insured is older, and permanent life insurance policies are more expensive than term policies.

Straight Whole Life/Ordinary Life/Continuous Premium

asic whole life insurance policy, and is the most common type of whole life insurance policy sold. The face amount and premiums are level and payable over the entire life of the insured, up to the age of 100. If the insured reaches the age of 100, the policy face amount is paid out to the policyowner. The policy is said to mature or endow if this occurs. straight life has LOWEST premiums compare to limited payment and single premium policies

All of the following characterize term life insurance, EXCEPT: Select one: a. Term life insurance provides the largest amount of coverage for the lowest amount of premium. b. Term life insurance provides pure death protection. c. Term life insurance provides living benefits (cash accrual). d. Term life insurance usually cannot be renewed beyond a certain age, usually 75.

c Term life insurance provides pure death protection (pays a death benefit only). Whole life insurance (permanent protection) provides life insurance for the entire life of the insured. It also is said to provide a living benefit because it accrues cash value, which is available to the policy owner.

Which of the following characteristics does not describe convertible term life insurance policies? Select one: a. No matter which age is used, premiums will be higher when the policy is converted. b. Most converted term policies use the insured's attained age to determine the new premium. c. The attained age is the insured's age upon purchase of the term life insurance policy. d. The terms of the conversion option are clearly stated in the policy.

c The original age is the insured's age upon purchase of the term life insurance policy.

Why would someone get limited payment whole life?

clients who do not want to pay premiums for their entire lives or people who are nearing retirement with liquid capital who don't already have permanent life insurance.

Some Feautres of Term policies

convertible term, renewable term

Whole life insurance provides...

death and living benefits.

Joint life

insure the lives of two or more people. Premiums for joint life policies are less expensive than if each life was insured on a separate policy.

Joint Life: First-to-Die

policy pays the face amount upon the first person's death. After the first person dies, the contract does not provide any further life insurance coverage for the other person. First to die joint life policies are often used for business continuation arrangements.

State insurance departments also regulate variable products. In some states, producers are required to have not only a life and securities license, but also a variable license.

Applicants for variable products must receive a prospectus at the time of policy application, which: Describes the investments, Any charges imposed on the contract owner, Policy features to help the applicant make an appropriate purchase.

Advantages of Whole

Covers the entire life of the insured Living benefits - cash value Level premiums help the policyowner plan investment

Equity Indexed Universal Life

Equity indexed universal life works the same way as universal life insurance, except the interest rate is tied to the stock market index, which has the potential to offer greater cash value growth than universal life insurance. Equity indexed universal life policies have a fixed guaranteed interest rate and a nonguaranteed indexed rate which can reach yields of 15% - 20% or more. This allows policyowners to reap the benefits of indirectly participating in the stock index. Typically, insurers use the S&P 500 Index.

Life Expectancy Contract

For a life expectancy term insurance contract, the number of years that the term policy will be in force is determined by the average life expectancy for insured's age and sex classification.

Variable life insurance is regulated by three pieces of legislation:

Securities Act of 1933: applicants must receive a prospectus, and defines a security product Securities Act of 1934: requirement for sales representatives to have a Series 6 license and regulates the duties of sales representatives Investment Company Act of 1940: requirement for insurers to maintain a separate account for variable investments and establishes a cap for sales fees

Two premiums are quoted to the policy owner:

Target premium - Paying the target premium will build cash value in the policy, and the policy will resemble whole life. Minimum premium - Paying the minimum premium will keep the policy in force by paying the cost of death protection, and the policy will resemble term life.

Death Benefits and Cash Value

The death benefit fluctuates based on the investment experience in the insurer's separate account. Within the insurer's separate account, policyowners have a choice of sub-accounts in which to invest funds. An insurer's general account is for non-variable products, in which premium dollars are invested in conservative funds such as bonds and certificates of deposit. Variable products premiums are invested in more aggressive investments such as stocks and securities, requiring the insurer to keep a separate account.

Variable life policies have a guaranteed minimum death benefit, which is the policy face amount, but the policy cash value is not guaranteed since it is tied to the separate account. Therefore, the death benefit will increase or decrease over time according to the investment performance.

The death benefit will never drop below the guaranteed minimum face amount. Cash value is figured daily and varies based on the investment in the separate account. Cash value may be borrowed or withdrawn at any time. Policy loans are subject to interest. If policy loans are not repaid, the death benefits are reduced by the amount of the loan plus interest. Policy loans are typically limited to 75% - 80% of the policy's cash value.

Endow cont.

The endowment policy provides a death benefit upon the death of the insured. If the insured is alive at the end of the premium-paying period, then the insurer pays the face amount to the policyowner. Endowment contracts mature on a particular date or when the insured reaches a certain age, such as 20 years from the date of purchase or when the insured reaches the age of 65. For this reason, the cash value in an endowment policy must accrue very quickly, demanding a significantly higher premium.

current rate = nonguarenteed rate

The first policy year does not build much cash value because the producer earns a large commission for selling new policies. Cash value is assessed monthly: the insurer deducts the cost of death protection in addition to a small amount for loading expenses. Cash value accrues in the policy when premiums paid cover more than the minimum amount required to pay the death protection and loading.

Death Benefit Options

There are two death benefit options for universal life policy owners: Option A (Option 1) pays a designated amount specified by the policy owner. Option B (Option 2) pays an increasing death benefit.

Variable Insurance Products

Variable insurance provides a way for policyowners to earn higher investment returns on life insurance policy cash values. With traditional whole life insurance, premiums are invested in the insurer's general account, which contains conservative investments carefully selected and insured by the insurance company. Interest rates provided by the general account are fixed and conservative, in the 3% - 5% range. With variable life insurance, on the other hand, policyowners have the opportunity to earn higher interest rates. The interest rate is variable because it is linked to the insurer's separate account, which fluctuates according to its investment performance.

Since the insurance company does not insure the separate account, the investment risk is borne upon the policyowner.

Variable life insurance products are securities contracts and are regulated by the Securities and Exchange Commission (SEC). Agents selling variable products must have a life insurance and a FINRA representative license.

Variable Whole Life

Variable life insurance provides permanent protection; it has fixed level premiums and a guaranteed minimum death benefit, just like ordinary whole life, but differs in that it offers higher interest rates, defending the policyowner against the effects of inflation. Premiums are paid at regular intervals. If the policyowner does not pay a premium after the policy grace period, the policy will lapse. The policy cash value is not guaranteed.

Regulation of Variable Products

Variable products are inherently riskier because the policyowner bears the risk of the choice of investment, and nonguaranteed cash value. Because of these risks, the SEC federally regulates variable products. Insurance producers selling variable products must be registered with FINRA by passing the series 6 or 7 examinations.

Variable Universal Life (VUL)

Variable universal life (VUL) is a mixture of: Whole life insurance Universal life insurance Variable life insurance. VUL policies provide flexible premiums, control of where cash value is invested, and a flexible death benefit. VUL is universal life insurance with a separate account. VUL policies have the flexible features of universal life and the investment choices of variable life. Variable universal life policies are regulated as variable products.

Option 1: Designated Amount

With option 1, the policy will pay a specified amount designated by the policy owner. The death benefit is level, consisting of the policy's cash values and pure insurance until the corridor kicks in, which allows for an increasing death benefit, so the policy does not fail the seven-pay test, turning into a MEC. The corridor is an additional amount of pure life insurance in the form of decreasing term, which is used to increase the policy's death benefit, so the policy does not exceed a certain maximum ratio of cash value to death benefit set by the IRS.

With a level death benefit the policyowner designates a death benefit amount that will remain constant. Growing cash values will replace a corresponding amount of pure death protection until the corridor is reached. Once policy cash values reach the corridor, the death benefit will increase to keep the policy tax-sheltered. With the variable death benefit, the policyowner chooses an amount of pure death protection that remains constant. The death benefit is comprised of the policy's cash value and the amount of pure insurance specified by the policyowner.

With universal life, sales, administrative, and loading charges are deducted from the policy's cash value along with the cost of death protection. The interest rate is credited to the cash value. Insurers are required to provide policyowners with an annual statement itemizing the charges and interest earned.

Some universal policies permit a cash withdrawal. All of the following are true statements about universal life, EXCEPT: Select one: a. It is treated as a loan. b. It will reduce the cash value. c. It is not subject to interest. d. Repayment is treated like a premium payment.

a A cash withdrawal from a universal life policy is NOT treated as a loan.

What policy provides flexible premiums, cash values, face amounts, premium-paying period and length of coverage? Select one: a. Adjustable life b. Whole life c. Equity indexed universal life d. Term life

a Adjustable life insurance policies allow policyowner's to raise or lower the premium and face amount, and change the coverage period and premium-paying period.

Which policy works the same way as universal life, but has an interest rate that is tied to the stock market index? Select one: a. Equity indexed universal life b. Adjustable life c. Flexible premium adjustable life insurance d. Universal life

a Equity indexed universal life works the same way as universal life insurance except the interest rate is tied to the stock market index which has the potential to offer greater cash value growth than universal life insurance.

What type policy would pay the death benefits after the first person dies if it covers two or more lives? Select one: a. Joint life b. Survivorship life c. Term life d. Universal life

a Joint life pays the death benefits after the first person dies. A survivorship life policy pays after the second person or last survivor dies.

Which of the following policies has a level face amount with level premiums? Select one: a. Level premium term b. Convertible term c. Decreasing term d. Annual renewable term

a Level premium term, also called level premium level term, has a level face amount and level premiums. Premiums tend to be higher than annual renewable term because they are level throughout the policy period.

Gerald wants a life insurance policy in which he can choose the investment vehicle. Which policy would you recommend to him? Select one: a. Ordinary whole b. Variable life c. Universal life d. Adjustable life

b Gerald would be able to choose where he wants his premiums invested with a variable life insurance policy.

What happens when a universal life policyholder pays the target premium? Select one: a. The face amount will automatically increase. b. The face amount will automatically decrease. c. The policy will resemble term life insurance. d. The policy will resemble whole life insurance.

d Paying the target premium will build cash value in the policy, and the policy will resemble whole life insurance.

All of the following are advantages of whole life insurance, EXCEPT: Select one: a. Life insurance protection is provided for the insured's entire life. b. Premiums are level. c. The policy has living benefits _ grows cash value. d. The premium-paying period may extend beyond the income-earning years.

d Because permanent (whole) life insurance protects the insured for their entire life, premiums are due each year until the insured dies. This may prove to be expensive when the insured is retired, and does not earn an income.

All of the following are characteristics of whole life insurance, EXCEPT: Select one: a. Whole life insurance is permanent protection providing death protection for the insured's entire life. b. Whole life insurance provides living benefits in addition to permanent life insurance. c. Whole life insurance policies use the insured's age at issue to establish policy premiums. d. The cash value in a permanent life insurance policy is not a nonforfeiture benefit.

d The cash value in a whole life policy is a nonforfeiture value, meaning that said funds cannot be forfeited, and the policyowner is entitled to such values.

Universal life insurance

described as a policy that lets the policy owner "buy term and invest the difference."

Decreasing Term

Decreasing term insurance provides a face amount that decreases to zero over the policy period. The face amount equals zero on the day the policy expires. The premiums are level. Some decreasing term insurance is convertible, but is usually not renewable upon policy expiration because the face amount is zero at the time of policy expiration. The convertibility feature in a decreasing term policy allows the policyowner to convert the term coverage to permanent coverage at any point during the policy period at the amount of the coverage at that point in time.

Features of variable universal life:

Flexible premiums Cash value based on investment in separate account Policyowners choose sub-account investments Access to cash values (policy loans and withdrawals) Death protection deducted from cash value Death benefit option 1 or option 2

Changes the policyowner can make to a Universal Life Policy:

Increase or decrease premiums Skip premium payments Increase or decrease policy face amount Universal life policies allow the policyowner to increase (with proof of insurability) and decrease the death benefit without having to replace or purchase another life insurance policy or have another policy issued.

Policy Loans and Cash Withdrawals

Just like whole life policies, as long as there is cash value in the account, universal life policies allow the policyowner to: Take out policy loans and Withdraw cash. Policy loans are subject to interest. If loans are not repaid, the amount of the loan plus interest will reduce the policy face amount. On the other hand, partial withdrawals or cash value surrenders are not subject to interest, but the insurer charges a small service fee. If partial withdrawals are repaid, the amount is considered a new premium payment and will be charged loading expenses. Full surrender of a policy's cash value can be made at any time, and a small service fee is charged.

Which of the following policies allows a policyowner to renew a term policy and receive a lower premium by providing proof of insurability?

Reentry term

Term to age 65

Term to age 65 policies cover the insured to age 65. The premiums are level throughout the term of the policy. At the start of the policy, the policyholder pays a higher premium than he or she would for a shorter-term policy in order to build up extra cash reserves that keeps the premiums level until policy expiration. The insured has the option of converting the policy to a cash-value policy before the insured reaches a specified age in the policy.

Universal Life (Flexible Premium Adjustable Life)

Universal life is sometimes referred to as flexible premium adjustable life insurance or unbundled insurance, and is a spinoff of whole life insurance. Universal life policies are similar to whole life in that they both provide death protection and cash value. The primary difference between adjustable life and universal life is that the policy owner can skip premium payments as long as there is enough cash value in the policy to cover the cost of death protection. Furthermore, universal life policies allow for adjusting the premium up or down and increasing the face amount up or down.

Interest Earnings and Cash Accrual

Universal life policies offer higher yields than ordinary whole life insurance. Universal life interest rates range from 8% - 12%. Ordinary whole life may earn 3% - 6%. Universal life policies have a guaranteed minimum rate, typically around 5%, that the policy is guaranteed to earn. The higher nonguaranteed rate the policy cash value may earn is called the current rate and is comprised of the minimum rate and the excess interest experienced by the insurer.

Variable life has fixed premiums. Universal life and VUL have flexible premiums. Flexible premiums allow the policyowner to vary the amount of the premium payment. VUL policies are issued with a minimum scheduled premium based on the policy's initial death benefit. This minimum amount covers the cost of death protection. As long as there is enough cash value to cover the cost of insurance protection, the policyowner can decrease or skip premium payments. The coverage will then resemble term insurance.

VUL policies have a level death benefit until the policy's cash values reach the corridor, at which point the variable death benefit applies, providing a variable death benefit according to investments in the separate account.

Limited Payment

With a limited payment (LP) whole life policy, the insured is covered for their entire life, but premiums are paid for a limited time. The face amount and premiums are level. The insurer guarantees the cash values and death benefit. If the insured lives to the age of 100, the policy matures and the policyowner is paid the face amount.

A Modified Endowment Contract: Select one: a. Is an overfunded life Policy b. Subject to the 6-pay test c. Has a withdrawal penalty after age 60 d. Withdrawal penalty is 15%

a A Modified Endowment Contract is an overfunded life insurance policy. It is subject to the 7-pay test, and it has a 10% withdrawal penalty before the age of 59 1/2.

What is the age and penalty for early withdrawals from a MEC? Select one: a. 59 1/2, 10% b. 60, 10% c. 59 1/2, 15% d. 70, 10%

a A Modified Endowment Contract is an overfunded life insurance policy. It is subject to the 7-pay test, and it has a 10% withdrawal penalty before the age of 59 1/2.

What type policy is on the life of the debtor? Select one: a. Credit b. Term c. Whole d. Variable

a A credit life policy covers the life of a debtor. It cannot be longer than the loan term or for a larger dollar amount. Credit life is usually a decreasing term policy.

In a MEC, all of the following are taxable EXCEPT: Select one: a. Death benefits b. Policy loans c. Policy Surrenders d. Withdrawals

a Death benefits are not taxable in a MEC, but a loan, surrender or withdrawal is taxable.

For what reason would the insurance company raise the death benefit of a universal life policy? Select one: a. Prevent the cash value from growing too quickly b. Require the policyowner to pay higher premiums c. To accommodate lower cash value growth d. To allow the policy to become a MEC

a Life insurance policies must comply with the seven-pay test in order to keep their tax-exempt status. If the cash value is growing too quickly, the insurer will increase the policy's death benefit so the policy does not become a MEC.

An adjustable life policy allows the policyowner to make all of the following changes, EXCEPT: Select one: a. Invest premiums in a separate account b. Change the length of the coverage period c. Increase or decrease the premium d. Change the length of the premium-paying period

a Only variable life policies allow policyowner's to invest premiums in the insurer's separate account.

What is the primary purpose of the Securities Act of 1933? Select one: a. Defines a securities product b. Regulates sales representatives' duties c. Requires insurer to maintain a separate account for variable investments d. Sets a cap for sales fees

a The Securities Act of 1933 defines a securities product.

Which of the following laws defined a security product? Select one: a. Securities Act of 1933 b. Securities Act of 1934 c. Investment Company Act of 1940 d. None of the above

a The Securities Act of 1933 ruled that applicants for a variable product must receive a prospectus. It also laid out a clear definition of a security product.

What policy can be described as annual renewable term with a cash value account? Select one: a. Universal life b. Adjustable life c. Decreasing term d. Modified whole life

a The cash value in a universal life policy must continually cover the cost of death protection (cannot reach zero); otherwise, the policy will expire after its grace period lapses. In this way, universal life policies are simply annual renewable term with a cash value account.

Because variable contracts are equity products, they are subject to various regulations. Which of the following applies to variable contracts? Select one: a. NAIC regulations b. The 12% rule c. Flexible premium amounts d. Insurance regulations only

b The 12% rule prevents producers from using illustrations with projected interest rates greater than 12% to induce people to purchase policies. They are not bound by NAIC, and they are regulated as both insurance and securities.

Sandra wants to have flexibility with her life insurance policy to accommodate changes in her situation. She should consider: Select one: a. Convertible term b. Adjustable life c. Limited payment d. Economatic

b The adjustable life policy offers flexibility on a variety of characteristics of the policy.

All of the following are guaranteed features in a variable life insurance policy, EXCEPT: Select one: a. Death benefit b. Cash value c. Premium rate d. Period of death protection

b The cash value is invested in the insurer's separate account, and is, therefore, not guaranteed.

Shane and Casey are looking at joint life and survivorship policies, which should they buy if they want to pay the taxes on the estate? Select one: a. Joint life b. Survivorship Life c. Term Policy d. Annuity

b They should buy a survivorship policy. It pays after the second person dies, which would allow it to be used to pay estate taxes.

Which of the following is true with regards to a Variable Universal life policy? Select one: a. The policyowner has no say in the investment choices, but can choose the premium payment b. The policyowner controls the investment choices and the premium amounts c. The insurer controls the investment choices in their general account d. The death benefit fluctuates, but only the insurer has a say in premium choices

b Variable Universal Life Polices allow the policyowner to control the investment of cash values and select the timing and amount of premium payments

Which of the following best describes option 1 under a universal life policy? Select one: a. The death benefit is the policy face amount or policy cash value, but not both. b. The death benefit is a designated amount specified by the policy owner. c. The death benefit is only the face amount. d. The death benefit is only the cash value.

b With option 1, the policy pays a designated amount specified by the policy owner.

Which policy has fixed premiums, a guaranteed minimum death benefit and nonguaranteed cash values? Select one: a. Whole life b. Universal life c. Variable whole life d. Variable universal life

c These are all characteristics of variable whole life insurance. Universal life and variable universal life insurance have flexible premiums.

Which life policy offers the owner the opportunity to invest in products such as money -market funds, long -term bonds and the stock market? Select one: a. Adjustable Life b. Term Life c. Variable Life d. Universal Life

c Variable life offers the policy owner the opportunity to invest in equities, bonds and money - market products.

Term insurance is categorized by all of the following, EXCEPT: Select one: a. Temporary protection b. Premiums increase each time the policy is renewed c. Policy cash value grows tax-deferred d. Provides the largest amount of protection for the least amount of premium

c Term policies do not accrue cash value. They only provide death protection.

What happens when the cash value of a life insurance policy equals the face value? Select one: a. Taxes must be paid on the interest accumulation. b. Premiums must be increased so the policy does not become a MEC. c. The policy endows. d. The policy is void.

c When the cash value in a life insurance policy equals the face amount, the policy endows, or pays out. Life insurance policies may not endow earlier than the insured's 95th birthday.

Credit life insurance

cover the life of a debtor in the event the debtor dies prior to paying off a debt. The creditor owns the credit life insurance policy and is the beneficiary. The debtor is the insured individual with the debt. Credit life insurance pays the amount of the outstanding debt.

In a universal life insurance policy, the two most common adjustments made during a month are: Select one: a. Decrease premium and increase death benefit b. Shorten premium-paying period and decrease premium c. Lengthen premium-paying period and increase death benefit d. Cost of death protection deducted and current interest rate credited

d Each month, the cost of the death protection is deducted from the cash value, and the current interest rate is credited.

All of the following statements are correct regarding variable universal life contract charges and fees, EXCEPT: Select one: a. Sales and loading charges are deducted from the policy's cash value. b. The full cost of death protection is deducted from the policy's cash value. c. Insurers must provide policyowner's with an annual statement of charges and interest earned. d. Interest earned is credited to the death benefit.

d Interest earned is credited to the cash value.

Index-linked whole life

have face amounts that increase with respect to inflation without requiring the insured to undergo a medical exam or provide proof of insurability. The Consumer Price Index (CPI) is used to determine the inflationary effect on policies. Insurers provide index-linked policies with annually increasing premiums or offer a premium that is level, but higher, to estimate and account for expected index changes.

At age 100

if the insured is alive at the age of 100, the face amount will be paid out to the policyowner. Mathematically, insurers determine a premium that must be charged which will earn interest so that the amount of cash value in the policy equals the face amount when the insured is 100.

Single Premium Whole Life

llows the policyowner to pay the entire premium in one large sum at the outset of the policy, and have coverage for the insured's entire life. The face amount is level. If the insured lives to the age of 100, the policy endows and the face amount is paid to the policyowner. The interest on a single premium whole life policy is a guaranteed minimum as stated in the policy. The Internal Revenue Code requires single premium policy face amounts be at least 100% to 250% of the cash value, contingent upon the insured's age.

A common use for using DECREASING TERM INSURANCE!!

mortgage protection to pay off the mortgage in the event that the debt is outstanding when the insured dies.

Drawback of Term Life Insurance

no living beneits term insurance can be increasingly expensice.Each time a term policy is renewed, the premium increases. Term renewals use the attained age of the insured to assess mortality, not the original age at policy application. As a person ages, the likelihood of death is greater, and term insurance accounts for this by increasing premiums. If term insurance must be discarded due to expense or the insured has surpassed the maximum age limit, then the insured may be left without any life insurance protection when it is needed most.

Flexible Premium Policies

non-traditional life insurance policies, offer life insurance policies with: Flexible cash values, Face amounts, Premium-paying period and Period of protection.

Whole life including both death and living benefits

premiums remain level for the life of the insured and in MOST CASES, the face amount is level

Interest-sensitive or Current Assumption Whole Life

provides flexible (varying) premiums based on a changing current interest rate.

Interm Term

provides instantaneous coverage and is intended for people who plan on purchasing permanent life insurance coverage within a year. Interim term is frequently offered to automatically convert to permanent coverage at a specified date in the future. The premium for interim term is based on the insured's age upon application. The premium for permanent coverage is based on the insured's attained age upon conversion to permanent protection.

MEC (Modified Endowment Contract)

A modified endowment contract (MEC) is an over-funded life insurance policy in which proceeds are subject to taxation. To determine whether a life insurance policy is a MEC, the IRS developed the seven-pay test under the Technical and Miscellaneous Revenues Act (TAMRA). To pass the test, the premiums paid during the first seven years of the policy may not exceed the total amount of level annual premiums that would pay-up the policy in seven years. If the policy fails the seven-pay test, it is considered a modified endowment contract. If the policy death benefits are increased, the policy undergoes an additional seven-pay test. The earliest age at which a life insurance policy may endow is age 95. The new 2001 CSO tables increase that age to 120.

Endowment

An endowment policy will pay the face amount under one of two situations: If the insured is alive at the contract maturity date, or If the insured dies during the policy period. The policy cash value must equal the face amount by the end of the policy period. Premiums for endowment policies tend to be higher to build cash value more quickly for an earlier policy maturation date.

Endow cont.

Endowment insurance is similar to level term insurance because it pays a death benefit only if the insured dies during a designated period of time. However, with a pure endowment contract the policy only pays a stated amount if the insured is alive at the end of the designated period of time. In this case, a death benefit is not paid. Therefore, an endowment policy combines level term insurance with pure endowment.

Endowment & Level Term Insurance

Endowment insurance is similar to level term insurance because it pays a death benefit only if the insured dies during a designated period of time. However, with a pure endowment contract the policy only pays a stated amount if the insured is alive at the end of the designated period of time. In this case, a death benefit is not paid. Therefore, an endowment policy combines level term insurance with pure endowment.

Term Insurance

It provides pure death protection if the insured dies within the policy period ++has no cash value ++has no living benefits such as cash accrual and policy loans If the insured outlives the policy period, fails to renew the policy, or the policy is canceled or expires, no death benefit is paid

Return of Premium (ROP) Term Policy

ROP term policy premiums are generally higher than a conventional term policy. The longer the term, the lower the premium. Premiums are returned to the insured if no death benefit has been paid and are not taxable.

Kara is interested in purchasing a life insurance policy that has steady premiums. She doesn't want to pay higher premiums when she is older. What policy should you not recommend to her?

Renewable and convertible term

Renewable Term

Renewable term insurance allows the policyowner to renew the term policy after the designated term expires, without having to prove insurability. The renewal premium will be based on the insured's attained age, so the premium will be higher. Because of this, renewable term insurance is sometimes said to have step-rate premiums. Typically, renewable term policies have an age limit to which the term policy can be renewed, such as 75 or 85. This is stated in the policy.

What are the three basic types of whole life insurance?

Straight whole life, limited payment whole life, and single premium whole life each based on HOW the premium is paid

Ordinary Life

Temp(Term), Permanent(Whole), Universal, Variable, and other interest-sensitive plans

Interest-sensitive or Current Assumption Whole Life Part II

The insurer may raise or lower the premium within a specified range stated in the policy. Higher interest rates allow the insurer to reduce the premium, and lower interest rates require the insurer to raise the premium. The policy has a guaranteed minimum death benefit and a guaranteed minimum rate of return. Premium changes usually occur annually. Funds are placed in the insurers general account.

For living benefits (cash accrual)... CASH VALUE PART 1

The policyowner can borrow against the policy cash value at any time, up to the amount of the cash value. However, the amount of the policy loan plus interest is deducted from the policy death benefit if not paid back prior to the insured's death. Therefore, the cash value of a whole policy is affected by interest rates, which is determined by a set formula by the insurer.

What type policy is tied to an index like the S&P 500 or the DJIA? Select one: a. Equity-indexed b. Indexed-linked c. Credit life d. Adjustable life

a An equity-indexed life policy is tied to an index like the S&P 500 or the DJIA.

A limited payment life insurance policy is best suited for: Select one: a. Josh, a 25-year old successful entrepreneur with extra funds, who doesn't want to pay life insurance premiums when he retires. b. Kelly, a 40-year single waitress who wants the most insurance protection for the least amount of money. c. Megan and Tom, newlyweds who need a life insurance policy to cover the mortgage on their house. d. Berry, an 18-year old student with limited funds.

a Limited payment policies are suitable for clients who do not want to pay premiums for their entire lives or people who are nearing retirement with liquid capital who don't already have permanent life insurance.

Term life insurance provides only....

a death benefit within a specified period of time.

Level Premium Term

a level face amount with level premiums during the policy term. If the policy is renewed after the term expires, the policy premiums will be based on the insured's attained age, or the insured's present age at the time the policy is renewed. In order to provide a level premium, the policy must have a premium that is on average higher in early policy years in order to offset the lower premium in the policy's later years.

Which of the following is not a characteristic of decreasing term life insurance? Select one: a. The policy face decreases to zero by the end of the policy period. b. The premium decreases to zero by the end of the policy period. c. The face amount equals zero on the day of policy expiration. d. Decreasing term insurance is often used to insure a mortgage.

b Premiums are level in a decreasing term life policy. The policy face decreases to zero by the end of the policy period _ on the day of policy expiration, the face amount equals zero. Decreasing term policies are often called _mortgage reduction insurance_ because they are used to insure a mortgage.

What type policy would pay the death benefits after the second person dies if it covers two or more lives? Select one: a. Joint life b. Survivorship life c. Term life d. Universal life

b A survivorship life policy pays after the second person or last survivor dies. Joint life pays the death benefits after the first person dies.

Which of the following is not true regarding the cash value in an ordinary whole life policy? Select one: a. It grows tax-deferred. b. It may be used as a policy loan without affecting the death benefit. c. It is a nonforfeiture value that is fully guaranteed to the policyowner. d. It can be used to pay policy premiums.

b Unpaid policy loans are deducted from the policy death benefit upon maturation.

An indexed-linked policy is linked to: Select one: a. Dow Jones Industrial Average b. S&P 500 c. Consumer Price Index d. Individual Retirement Account

c An indexed-linked policy is linked to the CPI (Consumer Price Index).

___________ policies have premiums that fluctuate between the current rate and maximum rate, as stated in the policy. Select one: a. Increasing b. Interim c. Indeterminate premium d. Decreasing

c Indeterminate premium policies have premiums that fluctuate between the current rate and maximum rate, as stated in the policy. The fluctuating premiums account for the insurer's actual mortality expense and investment experience.

Indeterminate Premium Term

have premiums that fluctuate between the current rate and maximum rate, as stated in the policy. The fluctuating premiums account for the insurer's actual mortality expense and investment experience. Premiums are typically lower in the early policy years.

Term issues based on face amount or face value (amount of coverage the policy provides)

in most cases, the death benefit = face amount. BUT IN MORE COMPLEX POLICIES, this is not the case

Industrial Life encompasses home service insurances

issued in very small face amounts, 1000 - 5000 premiums are paid weekly/monthly

whole life =

permanent protection + cash value

Indeterminate Premium Whole Life

policies provide a lower initial premium that can fluctuate up to a maximum premium as stated in the policy. The lower initial premium is guaranteed to the policy owner for a specified period of time. After such period, the insurer has the liberty to charge up to the maximum stated premium. Insurers are required to include a statement in the policy that the policy's nonguaranteed premium is lower than a fixed premium whole life policy with the same amount of coverage and for the same risk class. Applicants are required to sign a separate form affirming that they understand the elements of the indeterminate premium whole life policy including the following: Premium is variable, A lower premium is not guaranteed, The maximum premium as stated in the policy may be charged, Dividends in participating policies are only paid to policy owners if the insurer declares a dividend.

Reentry Term

sometimes referred to as reissue, permits the policyowner to renew a term life policy at the end of the policy period by providing evidence of insurability, so the insured can obtain a lower premium than the renewal premium that is offered without evidence of insurability. In essence, the insured is applying for renewal coverage as if he or she was a new applicant.

In an Equity-indexed whole life policy,

the cash valued is guaranteed. However, if the stock or equity index the contract is linked to does better than the guaranteed amount, the policy grows at the index's rate. So they have a guaranteed floor, but they don't have a ceiling on growth.

Cash Value PART 2

the policyowner is guaranteed and fully entitled to it. The policyowner may withdraw the cash value in part or in whole. If the policyowner decides to stop paying premiums, they have the option of cashing out the policy for its cash surrender value. If the cash value is depleted and premium payments are no longer paid, the policy will lapse.

In term life insurance

the premius is usually constant throughout the policy term. BUT THE face amount is what varies example) If the policy is renewed or converted, the premium is increased because the insured is older, requiring a higher premium.

Indexed or Equity-indexed whole life policy

type contract that is tied to an equity index. Examples of an equity index include the S&P 500 or the Dow Jones Industrial Average. It is similar to an interest sensitive whole life policy. HAVE FIXED PREMIUMS AND GUARANTEED DEATH BENEFITS