Chapter 2 part 4

That reserve held by the insurer is approximately equal to:

The aggregate cash values of policies in force.

This means that in early policy years:

You're paying more premium than necessary for your current mortality, interest, and expense.

A policy dividend is considered:

A return of unearned premium.

Because whole life insurance remains in force for the insured's entire life, and is guaranteed to be paid upon the insured's death at any age, whole life insurance policies are most suitable to meet:

A client's long-term life insurance needs.

Traditional whole life insurance has these two characteristics:

A fixed face amount and level premiums payable for the insured's entire life.

The excess premium charged in the early years of a traditional whole life insurance policy creates a fund maintained by the insurer, known as:

A reserve, to meet its death benefit payment obligations in future years, when mortality is higher and level premiums are insufficient to pay all claims.

So a client wishing to spend the least amount for life insurance that is guaranteed for life is best served by:

A traditional whole life insurance policy.

Whole life provides life insurance protection for an insured's entire life and it:

Accumulates a guaranteed cash value that the policyowner can use to meet a wide range of cash needs.

Over time, however, term life insurance premiums:

Can vastly exceed the premiums for whole life insurance.

Unlike term life insurance, whole life insurance never needs to be:

Converted or renewed.

The legal reserve is:

Debited in the later policy years to help pay death claims in excess of the premiums collected.

As premiums are paid, eventually these cash values:

Eventually equal the whole life insurance policy's face amount.

When the guaranteed cash values equal the policy's face amount:

The face amount is paid to the policyowner, and the insurance policy terminates.

Therefore the cost of insurance goes down over time for traditional whole life insurance because:

The insured's age goes up, but the net amount at risk goes down.

This two-year delay in the availability of cash value is necessary for:

The insurer to recover business acquisition costs.

Insurance that provides life insurance protection and a savings component:

Universal life insurance.

The level premium concept means that in the beginning of the policy:

You're paying more than necessary to cover the chance that you could die early in the policy.

The level premium concept means that at the end of the policy:

You're still paying a level term premium, even though you and everyone else your age are more likely to die.

Although whole life insurance is not limited to needs that will likely continue for a lifetime, it's particularly applicable when cash is needed at death for these expenses:

Estate taxes, estate settlement, final illness and funeral expenses, to provide income for surviving family. To satisfy charitable and non-charitable bequests. To equalize the amount of inherited assets when one heir receives a disproportionately large bequest, such as a family business interest.

Guaranteed cash values in whole life insurance policies are created from:

Fixed, level premiums.

The fixed, level premiums of whole life insurance cause a whole life insurance policy to create:

Guaranteed cash values.

Because of the permanent nature of whole life insurance, its death benefit is:

Guaranteed to be paid upon the insured's death at any age before the policy matures.

As premiums are paid, these cash values:

Increase.

Traditional whole life insurance has decreasing insurance costs. This means that costs go down for the:

Insurer, not the insured. The premiums don't go up or down over time.

Because of that, most dividends are:

Received tax free by the policyowner.

Guaranteed cash values provide the basis for:

Reduced paid-up and extended term insurance nonforfeiture options upon policy lapse.

Traditional whole life insurance has decreasing insurance costs. This means that:

Traditional whole life insurance has a level death benefit, and increasing cash value. This equals a net amount at risk that's constantly decreasing. Therefore the cost of whole life insurance decreases over time.

Life insurance having a fixed face amount and level premiums payable for the insured's entire life.

Traditional whole life insurance.

The life insurance coverage provided under whole life insurance is permanent and level, unless:

Unless paid-up additional term insurance is purchased by policy dividends. Some insurers offer the option to use policy dividends to purchase paid-up additional term insurance.

Life insurance has bundled mortality, interest, and expense assumptions. This means that:

Unlike some other life insurance products, like universal life insurance, the pricing for mortality, interest, and expenses isn't separated for whole life insurance. The pricing is all bundled together for mortality, interest, and expenses.

Any interest not paid when billed:

Is added to the loan balance.

If a policy is surrendered while a policy loan is outstanding, the outstanding loan balance at the time of surrender:

Is deemed to have become part of the surrender proceeds and is treated as a distribution.

Excess premium paid in the early years of the policy is:

Is held in trust by the insurer and added to its legal reserve.

The premium cost of traditional whole life insurance: whole life insurance offers policyowners significant guarantees with respect to death benefits and cash value. Therefore, the premium for whole life insurance:

Is higher than the premium for other types of life insurance with comparable death benefits.

Common dividend options include:

Taking them in cash, leaving them on deposit with the insurer at interest, reducing premiums, or purchasing paid-up additional life insurance.

Policyowners can normally borrow an amount up to:

The cash value.

Traditional whole life insurance ratemaking is based on:

The level premium concept, where the insurer charges a level premium throughout the life of the policy.

Whole life insurance has permanent protection. This means that:

The life insurance coverage provided under whole life insurance is permanent and level. As long as premium payments are up to date, the life insurance coverage never expires, A K A it provides permanent protection.

Because they're set based on the assumption of payment over the insured's lifetime, traditional whole life insurance premiums offer:

The lowest level-premium rates for guaranteed permanent life insurance coverage.

Although it's common to speak of a policy loan as coming from the cash value, that's not technically correct. In fact:

The policy's cash value is simply pledged as collateral for a loan from the insurer.

Since a policy dividend is considered a return of unearned premium:

It's not subject to income taxation until the total dividends received exceed the total premiums paid for the policy.

Actuaries determine the premiums to be charged based on those assumptions, modified by:

Modified by appropriate margins to account for unexpected contingencies.

The cost of insurance equation:

Multiply the death rate at the insured's attained age by the net amount at risk.

In a whole life policy, the difference between the cash value and the death benefit:

Net amount at risk.

As long as premium payments are up to date, the life insurance coverage:

Never expires.

The policyowner may repay the loan at any time, but there is no:

No scheduled repayment required.

Provisions in a life insurance policy that give the policyowner a choice of ways to use the cash value if the policy is terminated and that protect the policyowner from forfeiting the cash value.

Nonforfeiture options.

Although guaranteed cash values under whole life insurance policies may become quite large, and eventually equal to, the face amount, they are usually:

Not available for the first two years the policy is in force.

Policy loans are a common characteristic of:

Permanent life insurance.

All the main characteristics of whole life insurance:

Permanent protection. Bundled mortality, interest, and expense. Fixed, level premiums. Guaranteed cash value. Decreasing insurance costs. Policy loans. Participating or nonparticipating nature. Higher initial premium cost than other types of life insurance.

Guaranteed cash values are important assets. Whole life insurance policy cash values can be:

Pledged as collateral for loans from the insurer or a lending institution, and they're paid to the policyowner upon policy surrender.

How are policy cash values taxed:

Policy cash values are tax-deferred until distributed.

How are policy loans taxed:

Policy loans are tax-free.

A defining characteristic of traditional whole life insurance is its fixed, level premiums. Under the level premium plan:

Premiums paid during the life insurance policy's early years are more than needed to meet the insurer's mortality and expense requirements.

In addition, some insurers permit policyowners to use dividends to:

Purchase one-year term insurance.

Premiums for participating life insurance policies tend to be:

Somewhat higher than premiums for an otherwise identical life insurance policy.

Interest on policy loans may be a:

Stated interest rate such as 5, 6, and 8 percent are common. Or at a variable loan interest rate based on an index specified in the policy.

A charge imposed at the surrender of a life insurance policy during its surrender charge period and designed to enable the insurer to recover its unrecovered business-acquisition expenses:

Surrender charges.

Unlike universal life insurance policies, whole life insurance policies don't specifically impose:

Surrender charges.

Traditional whole life insurance ratemaking begins with:

The assumption that a policyowner will pay premiums until the insured dies.

In a nutshell, traditional whole life insurance has decreasing insurance costs because:

The death benefit is always the same, but the cash value keeps going up. So the net amount at risk, A K A the insurer's risk, goes down as the insured gets older.

Whether a policyowner's entire life insurance portfolio should consist entirely of traditional whole life insurance depends on:

The duration of that policyowner's life insurance need, and on his other objectives.

Life insurance has bundled mortality, interest, and expense assumptions. The expense that it's talking about is:

The expenses the insurer will incur in operating its business

Insurers charge interest on an outstanding policy loan until it's repaid, usually in arrears. This means that:

The insurer doesn't add the interest due to the loan balance until the end of the policy year.

Instead of surrender charges for whole life insurance policies:

The insurer's business-acquisition costs simply reduce the policy's early cash value. A K A in the early years of the policy, there's little or no cash value.

Because premiums remain level throughout the premium-paying period, the premium charged in the whole life policy must be structured this way:

The premium charged in the early years, when the policyowner's mortality is lower, must exceed the insurer's cost of paying death claims in those early years.

Life insurance has bundled mortality, interest, and expense assumptions. The mortality rate is:

The probability of death at each age:

Life insurance has bundled mortality, interest, and expense assumptions. The interest that it's talking about is:

The rate of interest the insurer will earn on policyowner premiums it receives.

In other words, even when you take out a loan against the cash value:

The whole life insurance policy's cash value continues to grow as though no loan had been taken.

Whole life insurance is designed to help policyowners meet:

Their long-term or permanent life insurance needs.

Traditional whole life insurance has availability of policy loans:

They allow policyowners to access a policy's cash value tax-free, even if the cash value exceeds the total premiums paid, meaning that the policy has a gain.

Traditional whole life insurance is participating or nonparticipating. This means that:

They either do or do not participate in the divisible surplus of the insurer. A K A they are or are not eligible to receive dividends, if and when dividends are declared by the insurer.

The guaranteed cash values of whole life insurance policies can provide funds:

To help policyowners meet emergencies and take advantage of financial opportunities during the insured's lifetime.

Can the insurer cancel whole life insurance:

Whole life insurance can't be canceled by the insurer unless a material misrepresentation appears on the coverage application.

Are whole life premiums fixed or variable:

Whole life insurance has fixed, level premiums, where the insurer charges a level premium throughout the life of the policy.

This means that in late policy years:

You're not paying enough premium to cover your current mortality, interest, and expense. However, in later policy years, the insurer draws from the legal reserve to help pay death claims that are in excess of the premiums collected.