Life Insurance Exam- Unit 4: Types of Life Ins. Policies

universal life (UL)

-was designed for people who want flexible premiums and flexible coverage over the course of their lifetime -UL premiums are flexible, not fixed, like whole life. -Premiums paid into a universal life policy accumulate as interest in the policy's cash value -Monthly interest credited to the cash value is either the guaranteed rate or current rate, whichever is higher -Every month a term cost of insurance and a monthly administrative fee are taken from the cash value by the insurer -As long as there is enough cash value to cover these monthly expenses, the policy will stay in force. -The policyowner may increase or decrease the death benefit, subject to any insurability requirements -In addition, the policyowner has the flexibility to choose one of two policy death benefit options. *Option A (or Option 1) provides for a level death benefit equal to the policy's face value --As a result of this choice, more of the premium is placed in the cash account, making the cash value rise more quickly. *Option B (or Option 2) provides for an increasing death benefit equal to the face value of the policy plus the cash account --Cash value does not increase as quickly because more of the premium is applied to the higher cost of the increasing death benefit over the life of the policy. -Withdrawals and loans may be made against the cash value account the policyowner can also surrender or "cash in" the universal life contract for its current cash value whenever he or she wishes. -Both whole life and universal life allow policy loans from the cash value -However, only universal life allows withdrawals (partial surrenders) from the cash value -Withdrawals reduce the cash value and the death benefit by the amount of the withdrawal -A withdrawal is federal income tax-free up to the cost basis (i.e., premiums paid) -Withdrawals above the cost basis are taxed as ordinary income -Unlike a policy loan, withdrawals do not require repayment. *** -flexible premium -cash account --cost of insurance withdrawn monthly --fees withdrawn monthly --current or guaranteed interest --option A: level death benefit (insurance amount only) --option B: increasing death benefit (insurance amount plus cash account)

advantages of flexible policies

-Adjustable life combines the guarantees of whole life insurance with the affordable premiums of term insurance in one policy. -The policyowner is allowed to adjust the mix of whole life and term based on his desire for affordable premiums and cash value growth. -Universal life's flexible premium means that policyowners can skip premiums without losing their coverage when money is tight, as long as there is enough cash value to cover the policy's monthly expenses. -The flexible death benefit allows the policyowner to adjust the death benefit as his life changes. Withdrawals allow access to the policy cash values without the requirement to pay it back. -Equity-indexed life insurance provides the upside potential of the underlying index with the downside guarantee that the interest crediting rate to the cash value will never be below zero. *** -flexible premiums -death benefit options -cash value

increasing term

-The death benefit of an increasing term policy begins near zero and grows over the term of coverage. -Increasing term insurance is appropriate to cover financial obligations that increase steadily over time. -Increasing term coverage also helps keep life insurance death benefits current with inflation and keep pace with rising cost of living expenses. *** -death benefit increases -premium increases

fixed premium schedule

-The policyowner selects the mode of payment for the policy's level premium on a fixed schedule -This can be a monthly payment schedule or another mode -If a premium is not paid when it is due, the policy will go out of force, or lapse.

continuous premium whole life

-The premiums for this whole life policy are the same each year for the duration of the contract -It is also referred to as straight life or ordinary life -If the policyowner discontinues making premium payments, they will receive the cash value of the policy.

death benefit components

-The whole life policy death benefit is payable upon the insured's death -The death benefit consists of two components: *The cash value, sometimes referred to as the savings element; and *An insurance protection element that must be paid in addition to the cash value so that the death benefit equals the policy's face amount -This is known as the net amount of risk to the insurance company, which represents the amount of money the insurer must have on hand to pay the death benefit -The benefit equals the cash value minus the net amount at risk at any given time. -Cash values increase each year; the insurance protection element decreases each year. -Whole life policies mature or endows at some point in the future -A whole life policy usually endows either at age 100 or 120 -If the insured is still living when maturity occurs, the cash value in the policy will equal the policy face amount and is paid to the policyowner -At endowment, the policyowner will pay income tax on any taxable gain.

characteristics of variable policies

-Variable policies are permanent insurance policies designed to provide lifetime coverage for the insured and have cash value and a death benefit. -the major advantage of variable policies is that they allow the policyowner to participate in various types of options while not being taxed on the earnings until the policy is surrendered. *** -life ins. plus investments -must have life ins. license & securities license -investments are in the separate account (securities)--owner can lose money

advantages of whole life insurance

-Whole life insurance is permanent coverage with guaranteed level premiums and it does not expire after a specified term -Cash values in whole life insurance policies accumulate tax deferred -By law permanent policies offer certain options in the event the policy lapses after premiums have been paid into the policy -These values include cash surrender value, paid-up insurance, or extended term insurance. *** -permanent coverage -guaranteed level premiums -lifetime coverages

equity-indexed universal life insurance

-a permanent life insurance policy that allows policyholders to tie accumulation values to a stock market index such as the Standard & Poor's 500 Index. -Indexed universal life typically contains a minimum guaranteed interest rate component along with the indexed account option -Indexed policies give policyholders the security of fixed universal life insurance with the growth potential of the underlying market index. -Unlike the interest-bearing investments that support most life insurance policies, stocks have no stated rate of return and may even lose value. -However, the downside protection of equity-indexed universal life policies guarantee that the interest credited to the cash value will never be below zero. *** -current interest on cash account --up or down based upon a stock market index --account still guaranteed by the company

types of whole life policies

-continuous premium whole life -limited payment -single premium--immediate cash values -modified premium--lower premium first 3-5 years, premium jumps once then levels off -graded premium--lowest initial premium of all whole life policies, premium increases for 5-10 years then levels off -indeterminate premium--premiums adjusted by the company, has a guaranteed maximum premium -interest sensitive--has a current interest rate, guaranteed interest rate

juvenile policy

-coverage written on the life of a child or a minor -juvenile policies are most often permanent life insurance. -In addition to the death benefit, juvenile life insurance provides the benefit of locking in the low premium for the child's entire life, and guarantees the child has life insurance in case their health changes in the future. -The death benefit of a juvenile policy may seem too small when the child is grown up. To address this, the face amount of some juvenile policies automatically increases when the child reaches age 18 or 21, with no corresponding increase in premium **These are called jumping juvenile policies. In some policies, the face amount of these policies jumps to five times its original amount. *** -death benefit may increase at a future age -jumping juvenile: policy automatically increases at age 18 or 21

indeterminate policies

-similar to a nonparticipating whole life policy except that it provides for adjustable premiums -the company will charge a current premium based on its current estimate of investment earnings, mortality, and expense costs -If these estimates change in later years, the company will adjust the premium accordingly but never above the maximum guaranteed premium stated in the policy. *** -premiums adjusted by the company -has a guaranteed maximum

joint life policy

-usually covers two or more lives with the death benefit being paid when the first insured dies -also called first-to-die policies -Once the death benefit is paid out, the policy ends. -A first-to-die policy may be the right product for married people who want a surviving spouse to be able to maintain a certain lifestyle but they want to pay less than the cost of two individual polices -Or a retired couple living on income from both of their pension plans would be ideal candidates for this policy. -When either spouse dies, the other will only have their own pension benefit to live on and the joint live policy death benefit would now supplement their retirement income. *** -first to die

level term

-The death benefit of a level term policy equals the face amount throughout the term of coverage -The premium also remains level during the term -the policy's term of coverage may be expressed in reference to either: *a number of years, such as 1-year term, 5-year term, 10-year term; 20 year term and 30 year term; or *a specified age, such as term to age 65 or term to age 70. *** -death benefit is level -premium is level for the term

types of variable policies

-variable life -variable universal

Which of the following is NOT flexible in a universal life policy? A. Premium amounts B. Premium schedule C. Guaranteed interest rate D. Death benefits

C

level premium

-The purpose of a level premium with whole life policies is to make lifetime coverage affordable at older ages -The level premium system results in overpaying for the risk of dying at younger ages, and underpaying in later years toward the end of life expectancy -As a result the premium amount paid for a whole life policy never increases from its original amount even if the insured lives to a very old age.

The death benefit of a whole life policy is

-fixed & level

specialized policies

-joint life -juvenile -jumping juvenile

Martha has a universal life policy she purchased several years earlier. At that time, the death benefit in the policy was $100,000. Her cash value is now $50,000, and she has selected death benefit option A. How much is her current death benefit?

-$100,000

Karen has a universal life policy she purchased several years earlier. At that time, the death benefit in the policy was $100,000. Her cash value is now $20,000, and she has selected death benefit option B. How much is her current death benefit?

-$120,000

advantages of term insurance

-Because term insurance provides only a death benefit, its premiums are lower than other types of life insurance policies -A term policy is initially the least expensive form of life insurance. *** -low initial cost

fixed, level death benefit

-Like its premium, the death benefit of a whole life policy is fixed and level -For as long as the policy is in force, the face amount remains the same.

In which type of term policy does the annual premium remain level throughout the policy while the death benefit decreases?

-decreasing term

survivorship policy

-insures two individuals and will pay the death benefit when the last insured dies -also called second-to-die or last-to-die policies -A survivorship policy costs less than purchasing two individual policies -this policy can provide money to pay estate settlement costs and related expenses upon the death of a second spouse *** -second to die

advantages of variable policies

-offer the potential of higher returns than the guaranteed rates paid on traditional life insurance products. -Investment-based returns have the potential to keep pace with inflation and because of the tax-deferred feature they may offer an attractive tax advantage for those in higher income brackets. *** -potential for high returns -keep pace with inflation -tax advantages

Whole life insurance is often referred to as

-permanent insurance

variable universal life

-variable UL is a universal life with a separate account. -also called flexible premium variable life. -variable universal life is a type of permanent life insurance, because the death benefit will be paid if the insured dies any time as long as there is sufficient cash value to pay the costs of insurance in the policy. -A VUL policy can lapse if the cash value falls below the amount needed to cover the monthly insurance premiums this means it does not have a guaranteed minimum death benefit. -Variable universal life policies have two death benefit options like the UL policy -Option 1 remains level regardless of increases or decreases in the cash value -Option 2 death benefit varies with the fluctuating cash value. *** -no guaranteed death benefit

variable life

-variable life is a whole life with a separate account instead of guaranteed cash value -also called variable whole life or fixed-premium variable life. -Variable universal life policies have two death benefit options like the universal life policy. -Death benefit Option A (or Option 1) remains level regardless of increases or decreases in the cash value, -death benefit Option B (or Option 2) varies with the fluctuating cash values. *The death benefit of a variable life policy will increase with positive investment results however in the event of negative performance, it cannot decrease below the original face amount -The original face amount is the variable life policy guaranteed minimum death benefit. *** -death benefit can increase -has guaranteed death benefit

Which of the following is NOT required to be able to sell variable policies? A. A state insurance producer license B. Registration with FINRA C. Registration with the NAIC D. A passing score on the appropriate securities exam

C

all of the following statements about term insurance are correct EXCEPT A. term coverage lasts only for the term of the policy B. term insurance provides on a death benefit C. premiums are higher than other types of life insurance policies D. no death benefit is payable if the insured dies after the term expires

C

all of the following statements regarding variable life ins. are true EXCEPT A. variable life's cash values will go up & down based on performance of the separate account B. variable universal life does not have a guaranteed minimum death benefit C. agents who sell variable life must be licensed to sell insurance by the state and also registered as securities representatives D. most variable life policies offer a guarantee of a minimum return

D

policyowner choice of separate account investments

-The number and type of investment choices available to the policyowner varies from company to company, and from policy to policy. -Most companies have suggested model portfolios to simplify the policyowner's selection for the variable policy.

When does the face amount of a jumping juvenile policy typically increase?

-age 18

Which of the following types of insurance is designed to provide life insurance protection for only a limited time?

-term life insurance

separate account

-variable policy characteristic -fund held by the life insurance company and maintained separately from the insurer's general assets -This account is established to hold premiums used to purchase funds/ investments that the company offers. This account is distinct from the general account established to hold insurer assets and premiums for their fixed insurance products.

Which of the following types of insurance requires a level premium and provides lifelong protection?

-whole life insurance

term insurance

-Term life insurance is the simplest type of life insurance -Term life insurance policies only offer a death benefit and remain in force for a specified period of time, or term -No death benefit is payable if the insured dies after the term expires. -types: level term, decreasing term, increasing term

cash value

-an integral part of a whole life policy, and reflect the reserves necessary to assure payment of the guaranteed death benefit.

disadvantages of whole life insurance

-Because the policy is providing lifetime coverage, the initial premium for whole life is higher than term insurance. -Unlike other types of permanent insurance, whole life premiums cannot be decreased and are not flexible -the death benefit cannot be increased -policy owner has no control over how the cash value is invested *** -premium not flexible -higher initial premium

decreasing term

-The death benefit of a decreasing term policy declines over the coverage period until it reaches zero at the end of the term -Decreasing term is appropriate coverage for financial obligations that decrease steadily over time, like home mortgages, bank loans, or financial obligations that require regular periodic payments. *** -death benefit decreases -premium remains level

Ashley has a policy that she must pay premiums on until she is 100 years old or until she dies. Ashley has

-continuous premium whole life policy

single premium whole life

-has one payment made at the time of purchase -The amount of this single premium, along with interest earnings, will cover all future costs of maintaining the policy -Single premium policies create immediate cash value. *** -immediate cash values

Which of the following statements about flexible polices is NOT correct? A. Flexible polices are temporary insurance B. Policyowners can change their premium or death benefit with an adjustable life insurance policy C. A universal life insurance policy is cash-value driven rather than premium-driven D. Policyowners cannot know in advance what their flexible policies' values will be

A

disadvantages of flexible policies

-Unlike whole life or term insurance, these policies are more complex -It is important the policyowner understand that premium payment amounts, interest rates, withdrawals, and death benefit changes can significantly impact the policy's long-term benefits. *** -more complex

Zelda agrees to pay premiums on her policy every year for 20 years. After that, she will no longer have to pay premiums, but her insurance protection will continue until she dies. Zelda has

-a limited-pay policy

Christy has a term policy that will allow her to switch over to a whole life policy at anytime during the first half of the term without providing evidence of insurability. What type of policy is this?

-convertible term insurance

life insurance policies

-divided into 2 basic classes: term & permanent policies -All life insurance policies pay a benefit upon the death of the insured -the amount of the death benefit is called the face amount because it's usually found on the first (face) page of the policy -Depending upon the type policy, the actual death benefit payable after the initial purchase of the policy can be equal to, less than or greater than the face amount. -Certain types of life insurance policies also offer living benefits - that is, financial benefits that are available while the insured is still alive -The differences between the types of life insurance policies arise from variations in how living and death benefits are provided

disadvantages of variable policies

-have no guaranteed rate of return -The policies are complicated and can be difficult to understand -variable policies are highly regulated by both federal and state agencies. *** -no guarantee rate of return -complicated -highly regulated

Which of the following specialized policies insures two people and pays its benefit when the first one dies?

-joint life policy

disadvantages

■ Term coverage lasts only for the term of the policy; it's like renting not owning the policy. ■ Term premiums increase as the insured gets older. ■Renewability features expire before the age of average life expectancy. As a result, individuals may not be able to obtain or afford coverage at older ages when their risk of dying is greater. *** -coverage for a short period of time

convertibility

-A convertibility feature allows a policyowner to convert a term insurance policy to a permanent type of policy without evidence of insurability and without having to submit an application -The conversion must be made before the term insurance policy expires. The premium for the converted policy will be based on one of two options: *Attained age: Insured's age at time of conversion *Original age: Age at the time the original term policy was written --A lump sum amount is required (down payment) that equals what the cash value would have been if permanent policy was original purchased instead of the term policy. *** -can be changed to permanent insurance -no new application required

graded premium life insurance

-have an even lower initial premium than modified whole life policies -The graded premium starts out lower than other types of whole life policies and increases every year for five to ten years until leveling off for as long as the policy remains in force. *** -lowest initial premium of all whole life policies -premium increases for 5-10 years then levels off

whole life insurance

-is a permanent insurance policy which is guaranteed to remain in force for the insured's entire lifetime ("whole life") provided the required premiums are paid, or to the policy maturity date -In contrast to term insurance, which becomes unaffordable or unobtainable at older ages, whole life insurance is designed to remain in force for the whole life of the insured and the premiums will never increase. *** -fixed premium -fixed & level death benefit -cash values --guaranteed interest --may be surrendered --may be borrowed --endows at age 100 -death benefit --amount of risk to the company -plus cash values

Which whole life policy allows for a lifetime of premiums to be paid in a shorter period of time such as 10 or 20 years?

-limited-pay whole life

Pam owns a 1-year term policy. At the end of the year, she may purchase another identical policy without showing proof of insurability. Pam's policy is

-renewable term

The distinguishing feature of a variable policy is that all of the earnings depend on the investment performance of a

-separate account

renewability

-with term life insurance, guarantees that the policy will renew (extend) at the end of its term -The insured does not have to re-apply or qualify medically for the coverage -The new renewal period will be for the same term as originally purchased -Ex. at the end of each five- year renewal period, a 5-year renewable term policy automatically renews for another five years. -The renewability feature guarantees the same amount of death benefit, however, the premium for the new renewal period will increase based upon the insured's age at renewal; the insured's attained age. -The payment of the higher premium at each renewal results in what is called a step-rate premium --1-year renewable term policy or A.R.T. (Annual Renewal Term) contract --The policy automatically renews each year but note that the renewal premium increases each year as the insured ages. *a 5-year renewable term policy would have level coverage & premium for 5 years then increase upon renewal for the next 5 years *renewable term policies expire at an age specified in the policy *** -no new application required -new premium based upon attained age

policy loans

-Life insurance policies with a cash surrender value usually have loan provisions (policy loan) that allow the policyholder to borrow up to the cash value of the policy. -The policy and its death benefit remain in force when cash is loaned and interest must be paid on the amount borrowed. -If a policy loan has not been paid back and the insured dies, the amount borrowed plus any interest charges are deducted from the policy's death benefit.

modified premium whole life

-sometimes called modified whole life policies -have lower premiums during the first three to five years. -Compared to a continuous premium whole life policy, in those early years, modified whole life policies have a lower cost similar to term insurance -However, after the initial period, premiums increase to a certain amount and then are level for the life of the policy, making them higher in cost than a continuous premium whole life policy. *** -lower premium first 3-5 years then levels off

no guaranteed rate of return & risk of loss

-Separate account investment options usually include a mixture of stocks, bonds, mutual funds, money market instruments, and even commodities. -Although investment performance is not guaranteed, it can provide higher rates of return than the guaranteed or current rates paid on other traditional insurance policies

flexible policies

-give the policyowner numerous options in terms of premiums, face amounts, and investment objectives. -These policy components can be adjusted in response to changing needs and circumstances. -types: *adjustable life *universal life *equity-indexed universal life

adjustable life insurance

-gives the policyowner the options to adjust the face value/death benefit, the premium, and the length of coverage without having to change policies -It also offers the ability to have term and whole life coverage in one policy -The amount of premium that the policyowner can afford is used to determine what type of insurance will best meet their needs. -If initially, an individual purchases an adjustable life policy with a large death benefit and low premium, it would operate much like a term insurance -All of the premium would be used to pay the death benefit and nothing would generate cash value. -If however the policyowner decided to lower the death benefit, the policy would now accumulate cash value like whole life insurance, assuming no reduction occurred in the premium payment -Increasing the premium without changing the death benefit would accumulate cash value more rapidly, and now the adjustable life policy would perform similar to a whole life policy. *** -policyowner -adjusts the death benefit --increase requires proof of insurability --adjusts the premium

return of premium term

-Return of Premium term policies will return all or a part of the premium paid for the policy if the insured is still alive at the end of the term -the premium for this policy will be higher than a regular term insurance policy, and the premium will also be dependent upon the percentage of premium that will be returned -A 100% return of premium policy would have a higher premium than a 50% return of premium policy, and a return of premium policy would be more expensive than a comparable level term policy. *** -premium higher than regular term policy -premium paid by insured is paid back if insured alive at the end of the term

interest-sensitive or current assumption whole life

-type of whole life insurance where the cash value can increase beyond the stated guarantee if economic conditions warrant. -The interest-sensitive policy has: ■ a fixed, level death benefit, and ■ a premium schedule fixed in regard to the timing of payments. -With interest sensitive whole life, the insurer will make investments with a percentage of each premium payment. -Excess or current interest from those investments may be credited to the policy to make the cash value rise -The interest rate is not fixed for the life of the policy and can fluctuate depending on current economic conditions . -Not only can the cash value increase more quickly, but the death benefits can also grow -The primary indicator for any increase is the current economic conditions. The policyowner will be protected from a drop in value below a stated minimum. *** -current interest rate -guaranteed interest rate

variable insurance: producer/agent registration

-Variable insurance is an insurance product that contains an investment element. -For this reason, both the securities industry and state insurance commissioners regulate these policies *agents selling variable policies must have a valid life insurance license -An additional variable products license is required in some states. *To sell investment products, agents must register with the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Association (FINRA) -Exams are required to obtain the necessary licenses.

comparison of life ins. policies

*death benefit: -level term= expires at end of term -whole life= fixed & level -current assumption whole life= fixed & level -UL= adjustable, level, or increasing options -variable life= varies w/ investment performance; original face amount is guaranteed minimum -VUL= adjustable; level or increasing options *premiums: -level term: fixed schedule, increases at each renewal -whole life: fixed schedule, level amount -CAWL: fixed schedule; amount may increase or decrease, but may not go above a guaranteed max -UL: flexible schedule, flexible amount -VL: fixed schedule, level amount -VUL: flexible schedule, flexible amount *cash values: -LT: none -WL: fixed & guaranteed -CAWL: current interest w/ guaranteed minimum rate -UL: current interest w/ guaranteed minimum rate -VL: varies w/ investment performance; no guaranteed minimum & at risk for loss -VUL: varies w/ investment performance; no guaranteed minimum & at risk for loss

limited-payment whole life

-Limited-payment whole life policies allow for a lifetime of premiums to be paid in a shorter period of time. -Common forms of limited payment whole life are: ■ 10-pay or 20-pay whole life; the premiums are payable in 10 or 20 level annual installments, and ■ lifepaid-up at age 65; premiums are payable in level annual installments from the date of purchase to the year the insured turns 65. -Annual premiums for limited payment policies will be higher than continuous payment policies -The premium payments are compressed into a shorter time frame resulting in a higher premium -As with all whole life policies, coverage is for the insured's entire life. -The cash value of a limited payment policy accumulates faster than a continuous premium policy -The cash value of a limited payment policy will continue to earn interest at the guaranteed rate at the end of the premium-paying period, and the policy still endows at age 100 (or 120).

policy surrender

-The "cash surrender" value of the whole life policy arises from the policyholder's rights to quit the contract and reclaim a share of the reserve fund attributable to the policy -By cashing in a policy, the policyowner gives up the death benefit.

guaranteed interest crediting

-The policy cash value increases steadily over the life of the contract because it is regularly credited with a guaranteed (level) rate of interest -The scheduled increases in the cash value are stated in the policy illustration.